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Market Analysis

Tarification dynamique : quelle implémentation par les fournisseurs?

European Directive 2019/944 requires suppliers with more than 200,000 end customers to develop a dynamic pricing offer for customers with a smart meter. These provisions have been transposed in France into Article L. 332-7 of the Energy Code. The CRE (Commission de régulation de l’énergie) has been tasked with defining the terms of these "regulated" dynamic pricing offers and executed this in a resolution dated May 20, 2021.

In addition to the regulatory obligation concerning four "large" suppliers (EDF, Engie, Total Direct Energie, ENI, Électricité de Strasbourg) who must offer these offers by July 1, 2023, suppliers are also highly interested in this new type of offer. This is the case for Barry and Leclerc, both of which launched offers this year.

We will look into the content of the CRE resolution and what it implies for suppliers.

         What Will a Dynamic Pricing Offer Look Like?

The CRE resolution confirms the definition of dynamic tariffs as "offers where the energy price is indexed, for at least 50%, to one or more indices of wholesale spot market prices (daily or intraday market), reflecting the variations of these market prices at least on an hourly basis." This means that the energy sold under a dynamic tariff to the final consumer is charged at the hourly spot price or the intraday half-hour price (the price of imbalances is not included in this definition). Ultimately, the consumer is billed a different price every hour or half-hour.

 

Dynamic pricing offers must be accompanied by clear communication to consumers regarding the volatility of electricity prices and the difficulty of predicting their electricity bill ex ante. Suppliers must also communicate to consumers, during the contract period, the price developments in a simple manner.

 

It is also noteworthy that the bills of consumers who have subscribed to a "regulated" offer (i.e., offered by a supplier with more than 200,000 customers) must be capped to protect the consumer. The monthly bill cap excluding taxes must be equal to double the monthly bill excluding taxes that the consumer would have paid at the corresponding basic TRVE (Tarif Réglementé de Vente).

This cap is, in reality, not impossible to reach during winter months. For instance, this year, the energy price in the TRVE is €55/MWh (base tariff: risk premiums and differences included; without commercial margin, TURPE, and taxes), while on June 30, the electricity price for the November 2021 futures contract is €103.81/MWh (and here we do not take into account the cost of the profile). The implementation of a bill cap and, ipso facto, a price cap protects the consumer but may also reduce the attractiveness of such offers. Depending on the structure of the offer, the consumer may be less incentivized to reduce consumption during price peaks, and the existence of this cap will generate risk premiums, increasing the average energy bill. Dynamic pricing offers that are not regulated (offered by smaller suppliers) will not have such cap constraints.

         What Does This Mean for Suppliers?

Suppliers wanting or needing to offer dynamic tariffs will face a series of investments to be made. On one hand, their billing systems will need to change dramatically in scale. From a maximum of one measurement index per month, they will now have to process about 1,440 measurements per month and compile them with the corresponding spot prices to produce a bill. These 1,440 measurements must also be made available to the customer, along with the spot prices used for billing. This requires upgrades to existing customer spaces and apps, which can be quite challenging for sometimes quite old IT systems. New suppliers incorporating these offers by design into their systems will likely face fewer difficulties.

Some suppliers might go further and offer solutions to help consumers control their consumption automatically during peak periods. Installing "boxes" or other IoT equipment to control flexible consumption (water heaters, electric radiators, EV charging, etc.) allows suppliers to differentiate themselves while providing their customers with solutions to reduce their bills and mitigate the risks of dynamic tariffs. However, designing, installing, and managing these boxes can often be complex for an electricity supplier.

Finally, on a somewhat more technical note, consumers with a dynamic pricing offer cannot be profiled like most households or small businesses. The consumption of profiled connection points is estimated on a half-hourly basis using standard coefficients published by Enedis, which replicate the typical consumption of a representative sample of sites. This means that all consumers in the same profile have exactly the same consumption pattern, regardless of their actual behavior. In the case of a consumer monitored via remote reading, however, actual consumption on a half-hourly basis is used. This necessitates an evolution of the suppliers' forecasting models, as the consumption of a portfolio of remotely read sites is likely to differ significantly from Enedis profiles.

Another phenomenon affecting supplier balancing is that, unlike a fixed price where consumption is an exogenous factor mainly dependent on weather and time of year, under dynamic pricing, demand becomes partially endogenous to price. Consumers will react to the price level, consuming less in case of price spikes and more when prices are low. This interdependence between price and consumption can be difficult to capture because it may depend on many variables (and may prove nonlinear, e.g., the existence of psychological/technical price thresholds at which consumers begin to postpone consumption). Anticipating this reaction in energy purchases is essential to make the most of this type of offer. This issue becomes even more critical when the consumer has equipment that allows them to automatically shift their consumption.

Additionally, simply switching a consumer from profiled to remotely read is currently not straightforward. There are currently two solutions: one goes through the supplier's balancing manager, who can request the change from Enedis. This service is free (for now) for sites with <36kVa, but it is manual, and the switch is made on the fifth Saturday following the request date. The other can be done directly by the supplier; they must activate a non-profiled supplier calendar in the meter (counterintuitively, the calendar itself is useless; it just needs to not be associated with an existing profile) within the meter. This activation can be done automatically via Enedis' web services.

It is also important to note that switching from profiled to remotely read does not automatically activate the availability of the consumption curve for consumers by Enedis. This must be activated, with the consumer's consent, via a separate service. The meter will continue to produce monthly indexes that will still serve as the basis for TURPE billing—the supplier will thus need to pray that the retrieved load curve and the consumption index are the same. In short, there is quite a bit of work on the network manager's side to simplify things.

 

         What Coverage Strategy for the Price Cap?

There are, in fact, two ways to implement the price cap described by the CRE:

1. The hourly selling price is capped at 2X the TRV energy price. The consumer never pays more than 2X the TRV for a given hour of consumption.
2. The hourly selling price is not capped, but the monthly bill is reconciled at the end of the month in case of exceeding the cap. The billed price is that of the cap and not that of the hourly spot price.

For the consumer, the financial outcome is the same; however, this slightly changes their incentive to shift their consumption. In the first case, the consumer has no incentive to shift their consumption as long as the price cap is exceeded over a long period of time (which is unfortunate, as price peaks correspond to peak periods of the system). In the second case, the consumer is incentivized to shift their consumption at least until they know that their bill will exceed the cap (so they should not be too informed...).

Faced with these implementations, there are several ways for the supplier to cover themselves in case of exceeding the cap. Indeed, if the supplier simply buys its energy on the spot market, they risk incurring a loss if they must sell at the cap price. The simplest way for the supplier is to buy a monthly futures contract as soon as it exceeds the cap price. However, there are still some residual risks associated with this strategy.

The first is that if the monthly price or spot price falls back below the cap price, the energy bought at futures must be sold at a loss. The other issue concerns the volume that must be purchased in advance. Indeed, this volume is still highly uncertain at M-X (month minus X) due to weather variability, and there is a correlation between this uncertain volume and the probability of exceeding the price cap. The higher the consumption, the more likely the price cap is to be exceeded (as prolonged price spikes are often due to cold snaps). If the supplier does not buy enough in M-X, they risk a loss as they will need to purchase the missing volume at a price above that of the cap. Conversely, if consumption is low and the price cap is not exceeded, they will have to sell those excess volumes at a loss. This risk will need to be factored into the suppliers' pricing of their offer via the application of a risk premium.

It is also possible for the supplier to buy structured products such as hourly option bands (in the case of the first implementation of the cap) or an Asian option (in the case of the second) with an exercise price at the cap price. But, of course, these options have a cost that must be factored into the offer.

Do you need a Price Forward Curve for electricity or natural gas? Contact me: sales@augmented.energy

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