Series of articles: Dynamic electricity tariffs – tariff types, advantages and disadvantages, technical requirements

Unlike a traditional electricity supply contract, where the price per kilowatt-hour (kWh) consumed remains constant, the price in dynamic electricity tariffs is flexible – it changes over time. This flexibility allows end consumers with electric vehicles or heat pumps, for instance, to benefit from dynamic electricity tariffs by using electricity during periods of low prices.

Starting 1 January 2025, all electricity providers must offer dynamic electricity tariffs in Germany. However, over 80% of German households still feel poorly informed about dynamic electricity tariffs [1]. Many electricity providers are also still determining how to design their dynamic tariffs effectively in the future.

For these reasons, our articles provide information on dynamic electricity tariffs for different consumer groups. We explain who can benefit most from specific tariff designs and how these tariffs can be structured.

Do you need support with dynamic electricity tariffs’ methodological and procedural development? Feel free to contact the experts at FfE listed below!

Figure 1 illustrates different types of tariffs. We differentiate between three types of tariffs:

1. Constant Standard Tariffs
2. Time-Variable Tariffs
3. Dynamic Tariffs

Constant Standard Tariffs (Constant standard tariffs are shown in Figure 1 as a black dashed line.) These are the electricity tariffs that the majority of customers in Germany currently have. Customers pay a base fee, typically monthly or annually, and a fixed price per kilowatt-hour (kWh) consumed. In 2021, Germany’s average household electricity consumption was around 3,400 kWh [2]. The average electricity price in the first half of 2021 was approximately 32.2 cents per kWh, resulting in a typical household’s annual electricity bill of €1,095 (excluding the base fee). By the first half of 2024, the average electricity price had risen to around 42.2 cents per kWh, increasing the electricity bill (excluding the base fee) to €1,435. [3] According to Verivox, as of late 2024, the cheapest providers offer around 26 cents per kWh. Therefore, simply switching providers can often lead to significant savings on electricity bills.

Time-Variable Tariffs (Time of Use Tariffs, TOUT)

For time-variable tariffs, different time slots are predefined during tariff creation, with electricity priced differently depending on the time of day. For instance, customers might pay a lower rate at night and a higher rate during early mornings and evenings. These tariff models have long existed, particularly for night storage heating systems. Variable prices remain fixed over a specified period, such as monthly or yearly.

Figure 1 shows an example of a time-variable electricity tariff in blue, with the hourly electricity price on the electricity exchange (spot market) represented in red as a reference. The variable tariff includes six price-time slots, each lasting four hours. Three price levels are above the constant standard tariff, and three are below. Time slots with lower electricity prices are typically at night and midday when high wind or solar power generation often leads to lower prices. Morning, afternoon, and evening slots, when demand peaks as people return home, are associated with higher electricity prices.

From the customer’s perspective, under such a tariff, intelligently controlled devices such as heat pumps, electric vehicles, washing machines, or dishwashers should ideally consume electricity during off-peak periods, like at night or midday.

Dynamic Tariffs

Unlike time-variable tariffs, the electricity price in dynamic tariffs is not set far in advance. Instead, the price is determined shortly before consumption—the previous day or even just a few minutes beforehand, depending on the tariff structure. Prices can also be more dynamic, changing, for example, every hour or every 15 minutes. Dynamic electricity prices are often tied to spot market prices, such as those on the day-ahead market, and therefore fluctuate similarly to the spot market.

In Figure 1, the lower graph illustrates an example of a dynamic tariff shown in green, closely aligned with actual spot market prices (in red). The similarity between the tariff and spot market prices depends on the tariff structure and, consequently, the electricity provider. Various additional components can be included in the tariff design, such as a potential price cap. This cap, represented by a dashed red line in the figure, prevents prices from exceeding a set limit, protecting customers from extreme price spikes.

In the illustrated case, customers benefit most when consuming electricity at low prices, such as between midnight and 6:00 a.m. or between 12:00 p.m. and 4:00 p.m.

Advantages and Disadvantages of Different Tariffs

The choice of the appropriate electricity tariff largely depends on the flexibility and consumption habits of the end consumers. Static consumers, who cannot or do not want to adjust their electricity usage, are generally best suited to a constant standard tariff. One advantage of this type of tariff is that it is easy to understand and does not require additional technical devices, such as a smart meter or energy management system. These tariffs provide predictability and stability.

Although constant standard tariffs are typically more expensive on average than other tariff types, static consumers face the risk of consuming electricity during periods of extremely high prices with non-static tariffs. Therefore, This consumer group cannot take advantage of low-price time slots or market developments. Currently, many German households are still part of the static consumer group.

Semi-Flexible End Consumers, such as those who can manually control household appliances like washing machines, heat pumps, and/or electric vehicles within specific time frames, will find time-variable tariffs appealing. This consumer group can save on electricity costs with variable tariffs by shifting electricity consumption to cheaper time slots (e.g., at night or midday). However, this requires a change in habits and some planning. At the same time, the price differences between the time slots encourage more conscious electricity usage.

The time slots defined in time-variable tariffs are usually transparent and predictable, allowing end consumers without automated systems to achieve savings. Moreover, the fixed price levels offer more planning security to semi-flexible consumers. Therefore, these tariffs are also suitable for less risk-averse consumers. Additionally, the cheaper time slots often correlate with higher shares of renewable energy (e.g., wind power at night or electricity from PV systems at midday), promoting the integration of renewable energy sources.

Flexible end consumers who can automate the control of large devices like electric vehicles or heat pumps benefit the most from dynamic electricity tariffs. This group can consume most electricity exactly when prices are the lowest. Flexible consumers can thus achieve the most significant savings of all consumer groups.

In dynamic electricity tariffs, low prices are even more strongly correlated with the high availability of renewable energy than with time-variable tariffs. This creates a better balance between supply and demand, enabling more renewable energy integration. The near-direct transfer of the actual costs of electricity generation and delivery also fosters more conscious consumption behavior. When more end consumers align their demand with supply, the need for expensive peak-load power plants may decrease, potentially lowering electricity prices for all consumers.

However, dynamic tariffs can be more complicated than constant standard or time-variable tariffs. Due to the unpredictability of the prices, dynamic tariffs come with a certain level of risk. Another potential drawback is that dynamic electricity tariffs require more advanced technical systems, as automation is essential for managing these tariffs effectively. These technical requirements are outlined in the next section. Despite these disadvantages, dynamic tariffs – especially for flexible consumers – can be very attractive in the medium to long term. It is crucial, however, that both the technical prerequisites and the individual needs of end consumers are aligned with such a tariff. As mentioned, dynamic tariffs can significantly increase static consumers’ costs.

Technical Requirements

In Germany, both analog and digital electricity meters are still in use. While the analog meter (Ferraris meter) measures electricity consumption purely mechanically and is commonly known as the black device with a rotating disc, a digital meter – or Smart Meter – measures electricity consumption every 15 minutes. This allows for accurate billing, such as according to market prices. When combined with a communication module – the Smart Meter Gateway – the measurement data can be sent to the responsible metering point operator and, through them, to the respective energy provider of the end consumers. The combination of Smart Meter and Smart Meter Gateway is called an intelligent metering system (iMSys).

For many providers, having an iMSys is a prerequisite for using a time-variable or dynamic tariff. Therefore, consumers with iMSys will be able to switch to electricity providers offering dynamic tariffs starting from 1 January 2025 and benefit under the right conditions. However, the installation of iMSys in Germany is progressing much more slowly than in other EU countries. Some providers offer transitional solutions that allow dynamic tariffs to be used even with analog or digital meters without a Smart Meter Gateway.

While with a variable tariff, it is still possible to manually switch on devices like the washing machine or dishwasher at midday, for dynamic tariffs, it is recommended to install an energy management system (EMS). An EMS can intelligently automate the control of consumers like heat pumps or electric vehicles, ensuring that electricity is consumed at the most affordable price. The EMS uses forecast data (e.g., predicting renewable energy generation) and data from local consumers (such as heat pumps or electric vehicles) to do this. It must be ensured that the installed EMS is compatible with the devices that must be controlled automatically.

Such an intelligent system, which enables flexible electricity consumption suitable for dynamic tariffs, should be planned and installed by professionals to ensure proper functionality. The following diagram shows a simplified representation of the intelligent system for implementing a dynamic electricity tariff.

In the next chapter of our series, we will explain the different types of dynamic electricity tariffs already available in Germany, how various tariff structures can be methodically designed, and which types of tariffs are suitable for which consumer groups.

Literature:

[1] Verbraucherzentrale Bundesverband e.V., “Dynamische Stromtarife: 19 Millionen Haushalte im Dunkeln“ 30.10.2024. Link: Dynamische Stromtarife: 19 Millionen Haushalte im Dunkeln | Verbraucherzentrale Bundesverband

[2] Statistisches Bundesamt, „Stromverbrauch der privaten Haushalte nach Haushaltsgrößenklassen“, 27. September 2023, Link: Stromverbrauch der privaten Haushalte nach Haushaltsgrößenklassen – Statistisches Bundesamt

[3] BDEW, „BDEW-Strompreisanalyse Dezember 2024“, 04.12.2024, Link: Strompreis Entwicklung in Deutschland für Haushalte und Industrie | BDEW