It
is important for any heat network or private utility network to recover
costs. The challenge, especially on smaller-scale networks, is to do so
fairly and demonstrate value.
There
is certainly some benefit of scale, where fixed costs can be divided
across a greater number of households and businesses, as well as the
ability to secure more advantageous raw fuel costs. This benefit of
scale is why numerous heat network operators are selecting service
providers for their entire portfolios, or bringing services in-house with solutions like Mabdeck to leverage greater value and minimise costs.
At Sycous we’ve developed intelligent tariff options within Orbit and our Mabdeck
Software and Customer Billing Services. We have worked hard to develop comfort
tariffs, where the use of IoT metering plus IoT temperature sensors can
be used to provide a minimum ‘comfort’ temperature, with the consumer
paying a variable rate for consumption above that comfort level. This
has many additional benefits, as well as cost savings, for fuel poverty
reduction and mould prevention.
Overall,
these improvements across the market mean that it is becoming more
viable to deliver a fair tariff for supplies such as heat.
Calculating a Heat Tariff
Heat tariffs are not limited by any maximum resale regulations. However, other fair pricing mechanisms or regulations may apply. You may also benefit from Government support, such as EBRS and EBDS, if you receive this support it is normally required you pass the benefit to your customers.
Heat is generated by one or more sources, potentially utilising a number of
different fuels, including renewables. This is further complicated due
to the conversion and thermal distribution efficiencies, or heat loss,
which can vary on each energy system. These heat losses are normally
included within heat tariffs to represent the overall cost of supply. If
these were not included the energy network operator would under-recover and this may be unsustainable.
There are two main options for calculating a heat tariff - competitor (or benchmarking) and cost recovery pricing.
Competitor pricing benchmarks the tariff against alternative supplies such as gas to ensure comparable cost
for the end consumer. The risk with this mechanism is that the level of
recovery may be insufficient to cover the actual costs of the system or
over recover, meaning consumers are not benefiting from affordable
heat.
An
alternative pricing mechanism is cost recovery pricing. This is
designed to ensure the associated costs of the system are fully
recovered within the consumer tariff.
This pricing mechanism can be the fairest way to ensure the long-term
financial sustainability. However, exact costs can be difficult to
determine and may sometimes conflict with the affordability of the
system.
Cost
recovery pricing often has two components, fixed and variable. This
allows for the distribution of fixed costs in the most fair and
equitable manner, often equally across the number of connected
properties and a separate metered consumption charge to recover the
variable costs.
The
actual tariff may also need to vary depending on the property tenure
and the associated statutory obligations. Under section 11 of the
Landlord & Tenant Act 1985 there is a statutory obligation implying
the landlord shall ‘keep in repair and proper working order the
installations in the dwelling house for space heating and heating
water’. This cost is deemed to be included within the rent and therefore cannot also
be charged within any tariff. It is often the case that some charges,
such as maintenance and sinking fund charges are included within the
service charges to provide a greater level of comparison and
transparency within the tariff.
The pricing mechanism selected will depend on a number of factors and often a hybrid pricing mechanism can be designed to balance the cost and affordability of the system.
Where hot water is installed, which measure in volume not energy, a hot water tariff need
to be calculated that accounts for the cost of the cold water and the
energy cost of heating the cold water to the supply temperature.
Communicating
with consumers can be challenging and as part of our Customer Billing Services
we regularly engage with consumers at open-days and other events. It
might also be worth checking out some of our FAQ’s that we have developed
for consumers at mySycous.com. Including our 'What is a Tariff?' explainer video below, which can help explain tariffs to consumers.
Water, Electricity and Gas Tariffs
The cost to consumers when reselling electricity, gas and cold water from an authorised supplier is regulated. The regulating body for electricity and gas supplies is Ofgem. The regulating body for cold water supplies it is Ofwat.
‘Maximum
Resale Price’ regulations require the reseller, or network operator, to
charge domestic consumers the same as what they have been charged by
the authorised supplier. This includes both the consumption and fixed charges.
These regulations mean it is especially important to regularly review tariffs to ensure compliance with these regulations.
These regulations do not apply to commercial supplies and energy that is generated, or sourced, locally.
It
should be noted an increasing number of energy networks have local
generation, such as PV arrays or CHP, supported by a connection the
grid. It can sometimes be difficult to accurately calculate the correct
tariff and as such it is advisable to calculate tariffs in the most
fair and transparent manner, alongside regular reviews to ensure correct
recovery.
Fixed Charges
There can be fixed costs associated with any supply, from administration through to standing charge.
When
these relate to water, electricity and gas utilities, you should check
whether the maximum resale price applies and the maximum associated
administration cost for the supply.
Otherwise,
and for heat and hot water supplies, you can charge a fixed
administration fee which can recoup fixed costs associated with
providing a supply. This can include billing, software, licenses and
other costs.
Wanting a review of your tariffs?
If you know, or believe you might be, under or over recovering on tariffs then we can investigate and provide a tariff analysis, utilising all metering data and current known or estimated costs.
As part of this analysis we will estimate efficiencies of your system based on all available data, helping you understand where further technical investigation may be required as well as recommending a tariff that is in line with your strategy.
We can also help monitor your tariff across a year, to ensure accurate and expected cost recovery occurs, as well as recommending updated tariffs whenever necessary.
Want some more help?
Don’t
worry, we’re happy to spend time supporting you to develop the right
tariff strategy and calculation for your application. Just Get in Touch
with our team and we’ll go through your options, as well as looking at
any ideas or innovations we might be able to incorporate into our Mabdeck Software.
