Following the implementation of Market-wide Half-Hourly Settlement (MHHS), we predict that energy suppliers will be become differentiated between those who merely ‘survive’ the industry change, and those who succeed in ‘thriving’ in the new environment through the development of innovative offerings.
Energy suppliers have a lot to deal with to be ready for the launch of MHHS in early 2025. It’s understandable that their initial focus will be on the nuts and bolts of preparing their systems within such tight timescales – and in our previous blog post, we looked at how to create an effective strategy and roadmap.
However, MHHS is more than a means to deliver half-hourly granular data for settlement; it’s a revolutionary shift that has the potential to change customer behaviours, unlock new opportunities for suppliers and move the country closer to net zero.
As suppliers grapple with the detail of MHHS preparation, it’s important they keep the big picture in mind, so they can incorporate ways to extract maximum value from the change into their strategies.
An opportunity for customer-focused innovation
MHHS is the most significant change to the way the electricity retail market operates since full competition was introduced in 1998. Jenny Boothe, Head of MHHS at Ofgem underlines this, stating:
“We can’t underestimate the importance of this programme. It’s a seismic shift in the market, driving us towards net zero and underpinning future innovation.”
At an industry level, there’s significant potential. For suppliers, it’s an opportunity to segment customer portfolios in a much more meaningful way, enabling them to tailor products and services more closely to individual needs.
However, it’s important to recognise that this more tailored approach won’t work universally. Less engaged customer segments or those who can’t afford to invest in the new technology that’ll be supported by MHHS tariffs may be left behind – and from a social responsibility point of view, suppliers will be under significant pressure to make sure these segments aren’t disadvantaged by the market changes. This is likely to affect the largest existing retailers more, because they typically have a larger proportion of their customer base in this situation, compared to newer entrants who have been able to attract more engaged, digital-savvy customers.
Integrated services are already beginning to evolve facilitated by elective half hourly settlement, for example intelligently controlled energy storage, heat pump and electric vehicle (EV) offerings optimised to the varying market price of electricity. It’s to be expected that new types of market entrants will use novel business models, for example, EV manufacturers offering a pay-per-mile subscription offering.
How MHHS could incentivise a change in customer behaviour
Initially, for the large majority of customers on a simple standing charge plus unit rate tariff, there’s unlikely to be a ‘big bang’ change impact. This type of straightforward tariff will probably continue to be available for the foreseeable future.
However, in this tight economic environment, many customers are cost conscious and alert for opportunities to make savings, and this desire to save money may make MHHS more attractive to more customers than it would otherwise have been.
MHHS will make energy tariffs that more closely reflect market costs more common, allowing suppliers to incentivise customers to change their consumption patterns to maximise value. It will also give more control to customers, allowing them to manage their electricity usage more efficiently, and at a lower overall cost.
In the short term, suppliers will offer the market a wider range of options, including more tailored time-of-use style tariffs with two or more time-bands. This may be attractive to customers who can’t or don’t want to actively manage their energy usage day by day. Smart metering challenges around connectivity and reliability will need to be addressed to ensure time-of-use type tariffs remain viable. Any improvement in this space can only help improve consumer advocacy and adoption of smart meters.
MHHS means suppliers will be able to move beyond simplistic ‘Economy 7’ style tariffs that make using electricity overnight cheaper than using it during the day. Instead, they’ll be able to expand their offerings to provide dynamic pricing, reducing the price of electricity when there’s a surplus of wind or solar power on the grid. Customers with large, controllable demands will welcome an expansion of offerings around dynamic pricing and automatic control over space heating, battery storage, refrigeration and EV charging.
How MHHS could benefit the supplier-customer relationship
Initially, suppliers may need to counter a cynical narrative propagated by smart metering opponents that MHHS will open the door for punitive “surge pricing” at peak times. In fact, it looks like the opposite is true. Suppliers are already beginning to incentivise use at off-peak times instead, for example weekends and afternoons as well as overnight, to shift demand. Over time, this reduction in peak load on the grid should flatten market prices and reduce the amount of new grid capacity required to support electrification of heating and transport. This will all customers in the long run and avoid the need for disruptive interventions such as rolling blackouts.
The first large-scale test of this approach has already happened. The Demand Flexibility Service, put in place by the ESO across the 2022/2023 winter was a huge success, proving the effectiveness of incentivising customers to shift their demand. The programme saved over 3,300MWh of electricity as consumers and businesses did their part to reduce demand at key times. In total, this was enough to power nearly 10 million homes across Great Britain.
It’s likely MHHS-driven tariffs, drawing on the success of the Demand Flexibility Service, will bring electricity usage and suppliers more to the front of customers’ minds. This will bring customers ‘closer’ to their suppliers, as they keep an eye on dynamic pricing schedules. It’s also probable that this could shift their perception of energy suppliers, positioning them as supporters of more environmentally friendly practices. An improved scheme is planned for the coming winter.
Introducing new MHHS-driven tariffs is a prime opportunity for suppliers to explain how this dynamic control of demand is an essential part of balancing out the more volatile production of renewable energy, as well as a way of taking advantage of periods of surplus which would otherwise be unused. Public awareness of the need for carbon reduction is high, and proactive, well marketed supplier action that helps customers feel part of achieving a net zero electricity grid will be well received and is likely to drive change.
On a cautionary note, this shift will take time and, as we have seen in other markets, consumer interest may remain low due to the perceived level of effort required. More automated offerings removing the need for consumers to manually control their consumption will be essential.
Will suppliers seize this opportunity for a ‘rebrand’ and forge a new future with their customer base? We’ll have to watch this space.
Get prepared for your MHHS future
Before suppliers can build this future, they need to get ready for MHHS – and this is a significant undertaking with a tight timescale.
Our role at the heart of the MHHS transition means we have a deep understanding of the new market arrangements and already work with market participants to help them understand their obligations in the MHHS Programme and the impacts of it on their business capabilities, processes and applications.
Our experts have taken this valuable knowledge and experience and created our MHHS business readiness assessment and roadmap services. If you’d like to focus on assessing your business readiness for MHHS, we’ll conduct a series of workshops and a playback session to help you establish where you are and to prioritise key steps. If you’d like extended support, we’ll carry out a more in-depth assessment, strategy and roadmap engagement to ensure your business thrives as a result of this significant industry change.