With countries all over the world looking into achieving net-zero, Ofgem, the UK legislator, aims to introduce market-wide half-hourly settlement (MHHS) by 2025. By aligning how the energy system is balanced and the way every customer is settled, Ofgem hopes to further extend trade market dynamics, already driving energy suppliers to balance, towards the consumer. Complete transparency on price and volume will motivate energy suppliers to come up with creative business models to help consumers shift away from peak usage or price periods. Ofgem’s ambition is now causing a paradigm shift for supplier operations with process flexibility becoming a critical driver in areas like pricing and billing.
In this blog, we’ll discuss the resulting challenges and opportunities of an energy supplier.
COUNTRY-WIDE SMART METER ADOPTION
Digital meter rollout penetration will reach 99% by 2025, allowing suppliers to have access to market-wide consumption usage. That’s almost 26 million meters transferring half-hourly values through a central body to suppliers. A tremendous amount of data to be used for forecasting, quoting, billing and hedging. Using all of this data throughout the operational system holds great opportunity to reduce risk and optimise cost transparency. But it does bring along challenges when it comes to data management, data processing and overall process automation.
MARKET-WIDE HALF-HOURLY SETTLEMENT
While generators and suppliers trade electricity in the wholesale market on a half-hourly basis, customers are settled on a ‘non-half-hourly’ basis. With consumer profiles evolving dramatically (adoption of solar panels, batteries, EV, …), Ofgem states consumers would benefit from having a direct connection with market prices. It is beneficial for all stakeholders to remove NHH meter estimations and GSP group error corrections from the settlement bill. Technically this imposes great operational challenges as it requires a connection between various data sources and systems. Suppliers have to obtain market domain data, meter data, consumption data, distribution and transmission losses and will need to move towards systems where all of these aspects can be calculated and billed practically on-the-fly. To achieve, automation of processes is key. How else are 26 million data points calculated, billed and settled per half-hour?
Cornwall insights state:
“To HH settle remaining electricity volumes represents around a hundred-fold increase in data collection, aggregation and validation compared to the existing half of HH settled volume.”
MARGINS ARE ALREADY TIGHT
MHHS mainly aims to benefit the consumer through the transparency of price. But what’s in it for the energy supplier? With margins already being tight, suppliers looked into extending their traditional business models with services outside the comfort zone for quite some time, with only a few successes to be noted down. Full transparency on electricity costs will likely further reduce already shrinking retail margins. But there is hope.
THE COMMON DENOMINATOR
MHHS will force energy suppliers to critically assess their operations and will move strategic investments to streamline operations. This will result in country-wide digitisation of energy supply operations by 2025. While initially painful, energy suppliers will be the first to benefit from these reforms.
A GOLDEN AGE FOR ENERGY SUPPLIERS
Key strengths of a supplier are defined by their large customer base, customer service, access to the wholesale market and being the central hub of all industry data. When done right, closing the value chain of offering electricity at market prices towards customers will create a great opportunity for an energy supplier.
“Energy suppliers have the opportunity to profit from customer-tailored energy-saving services based on data”
Half-hourly settlements can only be done by an entity that has access to the wholesale market. By being the system that connects market prices with customers, energy suppliers are in a unique position to transform user behaviour.
Let’s face it, consumers don’t care as much about energy usage as they should. Price incentives need to be significant and easy-to-understand to truly steer people to plan and act. True value is created by automating the full system, with smart appliances reacting to price incentives and dealing with human behaviour to optimise for great user experience.
Octopus Energy is one of the first to offer an agile Tarif by leveraging its Kraken technology platform. And they have found external interest, with companies like E.ON and Good Energy and Origin Energy investing, the platform aims to replace established billing platforms like Gentrack Junifer, Oracle CC&B and SAP IS-U. But is a billing engine replacement the only requirement towards HH settlement?
A STEP-BY-STEP APPROACH
Ofgem still has some hurdles to overcome to achieve true market-wide half-hourly settlement. There are still quite a lot of privacy concerns and overall data quality that needs looking into. It remains a question consumers will have the option to opt-in or opt-out of sharing private meter data. But this should not stop suppliers from moving forward with carefully assessing current operational processes and systems.
1. Data management
The first and most important asset that needs to be assessed and built for the future should be your data management tools. With more and more data becoming available, new standards invented and additional appliances connected to the network, managing data should never hold back your company from performing, reporting and innovating. Expect and anticipate more market-wide changes to come, as the system will be tweaked over time and MHHS only being a small part of the overall Ofgem decarbonisation plan. Use your I&C and SME segments which have higher digital meter adoption to experiment with the perfect setup for your business. As mentioned above, owning the end to end value chain is crucial to deliver value. Data management is the backbone of this system.
In theory, the only thing MHHS requires is customers being billed on half-hourly actual usage. It is, therefore, a no-brainer that investment in a proper billing engine should be the second step. While traditional billing systems have their strengths when it comes to applying processes and structures, we believe these platforms will never succeed at data processing. This is due to the inherent nature of the underlying transactional technology stack. For more info, check our blog post on the difference in technology stacks. At Gorilla, we enable any billing engine to settle half-hourly, at a fraction of the time and cost of a billing engine replacement project.
3. Proposition management & segmentation
To start, billing simple tariffs plans will be relatively simple. But settlement data is also used to calculate various costs of service. Imbalance volumes, network charges, capacity charges and legislation like a renewable obligation, require actual usage to be taken into account. Costs that need to be carefully modelled in your price models when diversifying your product portfolio. Flexibility should be at the heart of the systems you’re adopting. Don’t let your ambitions to extend services be stopped by the inability to adapt your internal processes.
The data is present and used, the business is benefitting from E2E automation of service. Further optimisation of margin can be achieved by leveraging all of this data to better predict user behaviour and anticipate events by doing bottom-up forecasts. With progress in the fields of AI and machine learning in mind, investment in systems to forecast with every meter’s individual profile and consumption characteristics will add value to the organisation. Whether it is by applying smart hedge tactics or extending the service towards your customers, forecasts can be used to inform customers of expected price drops to further drive behavioural change.
5. Value-added services
When all of the above is done right, a frictionless system is built to create, test and iterate. Market prices are directly transferred to consumers, who will be incentivised to balance the overall energy system. We imagine additional value can be established by further extending internal automation to consumer appliances. With a focus on appliances and systems impacting the customer bill. The future will bring smart charging of electric vehicles, vehicle-to-grid EV services, local energy markets and many more opportunities. Owning the assets to connect the dots and facilitate these models will bring a serious competitive advantage.
At Gorilla we believe one solution doesn’t fit all. By focusing on being the best at data management and processing, we supplement existing systems to achieve MHHS and overall success.