The Role of Dynamic Electricity Tariffs in the Energy Transition

With the phase-out of fossil fuels, Germany has set ambitious climate goals. A key component is the legislative introduction of dynamic electricity tariffs starting in 2025. These tariffs aim to provide commercial and residential consumers with a financial incentive to adjust their electricity consumption more flexibly in response to grid conditions. Dr. Christian Wilke, Project Manager at TransUrban.NRW - a real-world laboratory for the energy transition supported by the Federal Ministry for Economic Affairs and ClimateAction (BMWK) - explains what this entails, the advantages of dynamic electricity tariffs, and how we need to shape our energy system in the future.

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Mr. Wilke, at TransUrban.NRW, you are developing solutions for the sustainable transformation of grid-connected heating and cooling supply under real-world conditions. What role does the coordination of the various players in the energy system play in this process?

A very central one. After all, the switch to renewable energies not only affects private households, but also energy-intensive sectors such as industry, mobility, and commerce. While heating grid operators and electricity grid operators have largely operated independently in the past, close coordination among the operators of different infrastructures is necessary in a sector-coupled – i.e., electrified – energy system to keep expansion costs as low as possible. For the energy and heat transition, the overall system, comprising various producers and infrastructures, must be considered. The successful implementation of the energy transition does not solely depend on how many solar panels and wind turbines we install. Ultimately, the decisive factor is how, where, and when we utilize, distribute, and store renewable electricity.

Can you explain this connection in more detail?

The share of renewable energy in electricity generation is steadily increasing. This has implications for our power grid. During periods of low demand, such as at night or on sunny days, there is often more electricity available from renewable sources than the grid can accommodate. To alleviate this, the feed-in from renewable energy sources must be temporarily reduced at the local level. This process is referred to as "redispatch". At the same time, electricity demand can surge at other times, partly due to the increasing use of heat pumps and electric vehicles. The paradox is that, although the generation costs for renewable energy are lower than those for fossil fuels, these capacity bottlenecks lead to additional costs. In the future, it will therefore be essential not only to advance grid expansion but also to optimally balance supply and demand, and to create flexibility that results in cost reductions for consumers.

What does this mean for the relationship between energy suppliers and consumers?

Quite simply: we need to align our future energy system so that consumption follows generation — not the other way around, as it used to be. By adjusting their usage to be more flexible over time, consumers can not only save costs but also actively contribute to grid stability.

 How can this work in practice?

To understand the dynamics, I recommend looking at the "PowerSignal" app from the Fraunhofer Institute for Solar Energy Systems (ISE). It shows in real time what share of the load in the grid comes from renewable energies. The higher the share, the lower the price on the electricity exchange. Such information can help consumers adjust their electricity usage to match supply. For example, those with energy storage systems or electric vehicles can buy and store electricity when demand is low and prices are cheaper. Some consumers even become "prosumers" meaning they produce, store, and sell their electricity themselves. In other words, flexibility is becoming the new currency in energy supply — for households, businesses, and even entire cities.

... and this is where dynamic electricity tariffs come into play?

Exactly. While conventional tariffs have fixed prices, dynamic tariffs are based on the current price on the electricity exchange, which is largely determined by the proportion of renewable energy. This allows consumers to benefit from lower electricity prices, for instance, when demand is low or a lot of renewable energy is available.  

What advantages do these tariffs offer for property owners and tenants?

Dynamic electricity tariffs are a key lever for promoting grid-serving consumption behavior while also providing a financial benefit from the energy transition. This is a major advantage for tenants and owners of commercial properties. Combined with heat pumps and smart storage systems, they can cost-effectively meet the needs of energy-intensive buildings, such as those in the commercial sector. These properties often also have large roof spaces, ideal for installing solar panels. This saves even more costs since consuming electricity that was generated on-site eliminates charges like grid fees and levies. Any surplus energy can be fed back into the grid, generating additional revenue.

In public discussions, the terms "variable" or "time-variable" tariffs are often mentioned. What is the difference between these and dynamic electricity tariffs?

The main difference is that time-variable tariffs, as the name suggests, are characterized by predetermined time windows for high and low prices. For example, there are day and night electricity tariffs. Dynamic tariffs, on the other hand, are more flexible and granular. They take quarter-hourly values into account and are based on precise forecasts of the availability of renewable energies.

What requirements must buildings meet to benefit from dynamic electricity tariffs?

To make optimal use of dynamic electricity tariffs, a suitably advanced technical infrastructure is essential. Smart meters play a crucial role in this context. These intelligent metering systems are equipped with a special gateway connection, allowing for accurate monitoring and data-driven management of electricity consumption and generation within the building.

Why is it important for our society to engage with this issue?

We must recognize that the costs of generating electricity from renewable sources (wind, solar) will continue to decrease in the future, while the costs associated with expanding and digitizing the grid are likely to remain at least at their current levels. Our model project, TransUrban.NRW, demonstrates that climate-neutral heating and cooling supplies will only work with heat pumps and large thermal storage solutions. The price of heat is therefore critically dependent on the price at which the electricity for the heat pumps can be procured.

Dynamic pricing models enable us to purchase and use electricity for heat generation when it is very cheap. In order to be able to provide affordable heat, there is no way around dynamic electricity prices in the long term - both ecologically and economically. By successfully linking heat generation to fluctuating green electricity production, consumers can benefit from lower energy costs while simultaneously reducing emissions.

Having this context in mind, how do you envision the future of energy supply in 2050?

My vision for the future is an electricity supply that is based almost entirely on renewable energies. Consumers will not just passively purchase energy but will actively contribute to the system by flexibly adapting their electricity consumption through demand side management and dynamic electricity tariffs and by generating and storing energy themselves.

Decentralized generation structures will play a much larger role in this scenario. I see local energy communities, which exchange energy with each other as needed, as an important building block on this path. This alleviates the burden on central grid infrastructure and enhances local independence.

On a European level, supply security will be ensured through a European energy network. Through trans-European networks, partner countries can support each other during shortages. If too little electricity is produced in one region, neighboring countries can step in. All of this is achievable by 2050 - if we continue to invest consistently in the expansion of renewable generation, energy storage, and smart grid technology.