Will renewables lead to a consumption rebound?

A brief overview of the reasons why electricity tariffs will be adapted and the potential risk of rebound in electricity consumption

In previous posts, we discussed the cannibalization effect, the limitations of the LCOE concept, and the increasing volatility in prices. All these elements are a consequence of the rise of intermittent renewables and we will have to cope with them increasingly as we are currently deploying massively renewables. Solutions exist to mitigate the less-controllable generation, and one of them is Demand-Side Management (DSM). There are hundreds of companies working on enabling the load to consume when it is more needed. One key enabler for DSM would be the transformation of electricity tariffs, but could such transformation lead to increased overall consumption? Let’s dig in.

The signs are already here

There are an increasing number of signs that indicate a greater fluctuation in market prices. Hereunder are a few examples:

• Day-ahead prices in Spain: from close to 0 to above 100 EUR per MWh every single day of the week 15.

• Intraday prices in Germany: going below -200 EUR per MWh.

• Imbalance prices in Germany: reaching -2802 EUR/MWh on 9 April 2023.

• Day-ahead prices in Victoria (Australia): 50% of the time, wholesale price is negative in the afternoon.

In all these examples, we observe a great potential for DSM as the prices are very beneficial at some hours of the day. As we are deploying massively renewables, the need for shifting the load to these hours is becoming increasingly important. But can the consumers enjoy these prices already?

What does a consumer pay?

Consumers are not directly paying any of the aforementioned prices but they pay a certain amount based on a tariff, either to a private supplier or a public supplier with a regulated price¹. In general, we distinguish three key components in an electricity bill:

• The energy: the cost to actually produce the energy.

• The grid (distribution and transmission): the cost to bring the power to the consumer.

• The taxes and levies: any tax or levy deemed necessary by local governments and authorities.

Depending on the type of customer (household, small company, industry, etc.), different types of tariffs for each component can apply, from the simplest one (constant price per kWh) to something much more complicated including time-of-use, capacity tariffs, fixed payment, etc. On that matter, ACER wrote in a recent report on Electricity Transmission and Distribution Tariffs:

Tariffs can be designed in multiple ways. Finding the right balance between various tariff-setting principles (e.g. cost recovery, cost reflectivity, efficiency, nondiscrimination, transparency, non-distortion, simplicity, stability, predictability and sustainability) is a complex task and it involves different trade-offs, where different NRAs may identify different approaches according to the pursued principles in each national context. The complexities increase even more under a rapidly evolving energy system featured by increased integration of renewable energy sources, increased demand by electrification as well as by a more active role of network users, and require a regular reassessment of whether the tariff methodologies continue to be appropriate.

In a lot of countries, tariffs for LV customers are still mostly based on a price per kWh consumed, sometimes with the introduction of an off-peak tariff. Interestingly, Germany is still dominated by a standard flat tariff while Norway is leading in dynamic tariff.

A proposition

In order to enable the load to react to the coming oversupply of renewables at times when the sun is shining and the wind is blowing, consumers need to feel it. Consumers must be incentivized to shift the load when wholesale prices are low or even negative.

Here is a relatively simple proposition:

• Energy component: the energy component should be related to the real cost and value of electricity in real-time. It should be a dynamic tariff based on a combination of day-ahead price, intraday price, and balancing cost.

• Grid component: the consumer should pay the grid according to the cost components of the grid operator. The main costs are linked to the size of the cables and the grid tariff should therefore largely be capacity-based (EUR/kW). A smaller fraction could also be energy-based for the variable costs in order to cover the distribution losses for example, but similar to the energy component, this part could also be dynamic.

• Taxes and levies: this part should not counteract the incitatives created by the energy and grid components. The easiest way would be to have a simple proportionality such as a percentage of the total bill. This would be the equivalent of a Value-Added Tax (VAT).

Of course, tariffs in Europe are still largely far from this proposal. Nevertheless, there are signs that we are moving towards the introduction of such incitants. Some companies are already innovating: Octopus Energy. Under the 100% green electricity tariff with Plunge Pricing, consumers are sometimes paid to consume.

Let’s imagine a sunny day in 2030. The installed solar capacity is close to 600 GW in the EU, while the usual demand is around 300 GW or less. Electricity prices on the markets are very low. With the proposition, if I do not go beyond the capacity used in terms of kW for the grid component, I could potentially consume electricity for free. This would be a great incentive for plugging my electrical car, launching my washing machine, storing some power in my home battery, and maybe warming up water for my evening shower.

Only smart uses? The risk of a rebound in overall consumption

Besides these smart uses, I might also increase my consumption that I would normally not have if I was paying for it. This can be related to a rebound effect or Jevons Paradox. From Wikipedia:

In economics, the Jevons paradox occurs when technological progress or government policy increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the falling cost of use increases its demand, increasing, rather than reducing, resource use. The Jevons effect is perhaps the most widely known paradox in environmental economics. However, governments and environmentalists generally assume that efficiency gains will lower resource consumption, ignoring the possibility of the effect arising.

Therefore, incentivizing us to shift our consumption patterns might well end up increasing the total energy demand, countering the objective of energy efficiency. We might get warmer swimming pools and cooler houses. We might also travel more with our personal electrical car and take a longer shower. History has shown us that the rebound effect happened constantly throughout history, so why not this time with renewables?

This rebound effect seems to be generally absent from the debate. In general, both objectives of renewables expansion and energy efficiency are set simultaneously. But for the integration of renewables, we would need to incentivize electricity consumption at certain moments. Of course, consumption, when renewables are low, would be discouraged but my personal opinion is that it is more difficult to reduce consumption when prices are high than to consume more if it is free. Will shifting the demand be neutral or will we experience an increased electricity consumption?

1. A regulated price set by the regulator, especially for LV customers, is still a common practice in various countries in Europe.