The Role of End Consumers in the Future System Or ‘How does this affect me?’

Swiss households are directly responsible for about one third of the Swiss energy consumption. This energy demand is mostly for space heating (ca. 60+%) and water heating (ca. 15%). Electrical appliances like light, cooking, washing, or media cover the rest. This composition is similar to the rest of Europe (see Figure 10). This only includes the direct energy usage at home. But also for the rest of the energy consumption households are the main driver of demand due to our energy needs for mobility and our consumption of goods.

Consequently, households also pay for most of the energy costs either via tariffs (for electricity, gas or district heat), direct fuel payments (for cars or heating fuel) or indirectly via product prices for all energy embedded in the respective products. Given the increase in importance of the electricity sector in the future, the electricity tariff will become a central element for financing our future energy system.

Figure 10: Energy consumption for different households uses in 2020 (Source: Eurostat)

For the coming decades, large investment needs have been identified for the Swiss energy system. For example, Trutnevyte et al. 2024 estimate annual investment costs for 2020 to 2035 for the expansion of renewable electricity generation in Switzerland that correspond to an order of magnitude of 100 CHF per capita a year. The Energy Perspectives 2050+ suggest that investment needs will further increase in the long run to cover the replacement of decommissioned nuclear power stations with renewables, increased generation to cover increasing demand, adjustments to the electricity grid, and investments into batteries and other storage capacity.

Of course, a major system always requires investment, even more so as numerous of our larger electricity plants were built many decades ago and our current system needs to be expanded. In the current situation, renewables are among the more inexpensive solutions for securing the future electricity supply, and their cost advantage tends to increase over time. 

Furthermore, investment costs are only one cost component and cost per capita are not the same as the energy bill one has to pay. As future system costs are uncertain, so are the costs any individual will need to pay. Nevertheless, some general insights can be derived from studies.

For many households, the electricity bill will be the only energy bill left

A part of the required future electricity bill can be attributed to the electrification of heating (e.g. heat pumps) and mobility (e.g. electric cars). Thus, it would be misleading to compare the future expenditure for electricity with today’s electricity bill, as that future expenditure replaces a considerable part of today’s expenses for fossil fuels, which will be phased out. In 2021, Swiss households spent 0.80% of their gross income on electricity, 0.37% for heating with fossil fuels or district heating and 1.16% for gasoline and diesel for their cars (BFS, 2023).

Albeit costs for individual technologies are expected to decrease over time (i.e. PV panels, electric cars etc.), it is still unclear how the cost of new system mix will compare. Costs are influenced by policy and technology choices. Restricting the set of admissible solutions tends to increase total system costs, e.g. when limitations on the net imports of power are imposed or the installation of specific renewable technologies are ruled out. Energy mixes that involve green hydrogen and synthetic fuels in important amounts are usually projected to be more expensive than electricity-centered strategies that predominantly rely on solar and hydropower (see e.g. Panos et al. 2023).

Despite high investment needs in the coming decades, there are also factors that make energy use cheaper: 1) electrified energy systems are technically more efficient than fossil-fuel based combustion processes, 2) technical progress, learning and advantages of mass production significantly decrease the power generation cost per kWh for new renewables over time, 3) the efficiency of energy use increases over time (i.e. in its central scenario, the Energy Perspectives (ZERO Basis) 2050+ study (Prognos et al. 2021) assumes that Switzerland’s total energy consumption falls by 36% between 2019 and 2060 despite an economic growth of 48% during the same period), 4) with economic growth, most of us become richer, so even if the energy bill rises in real terms, the share of income spent for energy services could fall.

In other words, we are currently unable to reliably predict how the energy spending share is going to change for Swiss citizens. While the total electricity bill may increase, we cannot say whether the future bill for energy, i.e., for electricity and fuels, will be higher or lower than today’s bill. However, the shift in cost structures away from variable fuel fixed costs will reduce the vulnerability to shifts in fuel costs (i.e., as has been experienced in recent years with the European natural gas prices due to the Russian invasion of Ukraine, Figure 11).

 

Figure 11: Natural gas prices in EU 2008-2023 (Source: eurostat).

 

 

With weather dependent renewables, the nature of electricity tariffs will change

As the output of many renewables tends to be weather dependent, flexibility becomes increasingly valuable in a renewable dominated electricity system. Electricity users can contribute their share by shifting demand with the help of smart solutions to times when wholesale electricity prices are lower. As this saves money for the electricity provider, customers that offer flexibility can expect to participate in the savings. The flexibility will potentially be owned by the user (i.e., battery coupled PV systems, heat pumps, electric cars), so utilities or other service providers will have to make attractive offers to the users to be able to profit from the flexibility. The electricity tariff is the central element for utilities to send incentives to consumers and tap their flexibility potential.

It is likely that there will always be the opportunity for households to opt out of demand-side flexibility measures, but contracts which allow the electricity provider to use the flexibility should be rewarded with lower prices for consumers, as otherwise they would have no incentive to offer the flexibility.

More renewable energy is only one of the reasons for cost changes

While a large focus in the ongoing political and societal debates is on the extension of renewable energies, the choice for a specific renewable strategy is just one element affecting the overall cost development – and not necessarily the decisive one.

One reason for choosing renewables is the climate change induced net-zero target, which requires phasing out fossil fuels. Fossil fuel usage comes with environmental and health related impacts (the external effects). Consequently, a shift away from fossil fuels leads to a reduction in external costs, regardless which specific renewables are used to provide energy. For example, Ecoplan (2022) estimates the external costs of air pollution in Switzerland from generating heat with heating oil at 1.03 Rp per KWh for 2015 (for comparison: in 2015 heating oil prices ranged between ca. 5.5 to 7.5 Rp per KWh). This estimate does not even include climate change effects. While no energy technology is without external cost, they are significantly lower for electricity generated from renewable sources. Thus, the further electrification of the energy system will reduce external costs if it is a renewables-dominated energy system.

At the same time, a future increase in electricity demand is likely regardless of the renewable strategy, and this influences the costs. Having said that, demand developments depend on social values which – over the course of decades – are subject to change and particularly difficult to predict. In summary, the electricity transition is part of the larger energy transition, which itself is part of the larger transition of our economy and society to carbon neutrality.

As the votes on the climate law in Switzerland 2021 and 2023 have shown, the distribution of costs and benefits amongst the Swiss population is an important element for the acceptance of specific solutions.

 

Electricity tariffs will remain an important source for refinancing investments into energy infrastructure

Given the significant investments needs, utilities, pension funds and other major investors are likely to stem a large share of those capital needs via equity capital or external financing. However, with decentralized generation (e.g. rooftop photovoltaics), small and medium-size businesses as well as households increasingly become part of the electricity investor landscape.

As with every investment, the investors expect a rate of return. For large scale investments electricity sales will be the main source of revenue. For small investments the saved electricity costs will often be an important element of the benefit assessment. Consequently, investment levels will depend on the electricity prices that can be expected or the tariffs investors need to pay for their remaining electricity consumption. Given the lifetime of most generation assets of two decades or more, the same uncertainty impacting future cost assessments is also impacting future price expectations. In addition, the levels of Swiss electricity prices that we will see in the future will also depend on European politics.

Investment risk is an important driver for investment decisions, and a reduced risk perception can facilitate external financing and reduce external financing costs by lowering the offered interest rates. For example, in Switzerland, the financing cost for renewables is currently lowest for small rooftop solar installations (Dukan and Steffen, 2024) while wind power plants face a 1.5 times higher financing cost due to their higher risk. The risk distribution between generators, utilities and consumers is therefore a central element of future electricity market design (see also CREST 2017).

 

Homeowners have more options than tenants

In general, homeowners are expected to have an advantage over tenants, as they have better opportunities to become prosumers, i.e. not only consume electricity, but also produce electricity via local renewable sources. Prosumers and other flexible users can likely benefit from incentives provided by utilities to offer their flexibility. This in turn requires an investment e.g. into PV systems, batteries or smart home solutions.

Especially PV systems are already becoming widespread. A part of the generated electricity is for own use, but as generation profiles and usage profiles do not match, prosumers usually also supply electricity to the grid and at other times they demand electricity from the utility. Batteries – stationary or in electric cars – can further help to better match the prosumer’s electricity supply with the own electricity consumption profile. With a shift towards large scale PV deployment, increased installation of heat pumps and e-mobility, prosumers are expected to become a central element the future electricity system. Tapping the associated flexibility potential via new tariff designs will be equally important.

Tenants on the other hand have a more limited options space. Regulations on the building side, overall tariff design, as well as incentive structures for landlords are therefore important elements of the energy transition. The participation of the demand side through smart solutions is a central challenge of the future electricity market design and an ongoing field for research on novel forms of cooperation, business models and incentive structures.

 

Federal, cantonal and municipality provisions and responsibilities are intertwined

The energy transition is not only a tale of markets, investors, and consumers but also about policies, regulations, and relations between different levels of state, i.e. municipalities, cantons and the federation. Policy measures on different levels can involve taxpayers in financial flows for the Swiss electricity and energy system, even if energy users remain the principal payers.

Today public support for renewables in Switzerland is fragmented between the federal government, cantons, and municipalities (with some private organizations also offering subsidies). For example, regulations and support for solar PV are a mix of investment subsidies from the federal government (BFE, 2024) and some cantons for various types of installations, spatial planning on the cantonal level (i.e. Spatial Planning Act), and highly heterogeneous policies on the municipal level (Schmidt et al. 2023). For many investors, however, it is more important how much they receive from their local utility for electricity that is fed into the grid. These feed-in prices are set by the utilities and vary greatly in a range from less than 4 Rp/KWh to 25 Rp/KWh (VESE, 2024).

Subsidies are also available for other renewable energy sources such as biomass, wind, hydropower, and geothermal energy.

In today’s energy system our energy consumption is either in the form of filling up the tank of our car, ordering heating oil, or just using it and paying via a tariff (i.e. electricity, district heat, natural gas networks). The shift towards an electricity dominated energy system will therefore also alter our energy usage perception.

 

Direct fuel consumption will decrease while network-based energy consumption will increase

In a net-zero energy future, households will consume a major part of their energy in the form of electricity. For many of us, this will mean that we will not fill up the car with gasoline or diesel anymore nor order heating oil for the coming winter. Instead, our energy will mostly be provided by network-based services with a tariff. With network-based energy provision we usually do not think so much about the actual energy usage. While most car owners can tell how much fuel they need for 100km and what the current fuel price is, most of us don’t know how much we pay per kWh of electricity, district heat or natural gas, or how much kWh many of our electricity appliances actually consume when turned on. The perception of energy usage is therefore also an important aspect to investigate for a successful energy transition.

 

Active demand participation will complement renewable energy provision

The generation profile of intermittent renewables does not necessarily match the demand. This can happen within a day if electricity consumption increases after sunset when solar energy is no longer available; or within days as weather conditions change; or within a year with differences between summer and winter. These are reasons why wholesale prices are expected to become more volatile in a renewable based system and why storage and flexibility become an important part of supply security. The demand side is part of this storage and flexibility provision. Therefore, electricity consumers can take a more active part in our electricity system. Activating this participation via incentive structures but also potentially shielding end-consumers from short and long-term price fluctuations will likely be part of the responsibility for retailers.

It makes economic sense to exploit demand side flexibility potentials (Srinivasan et al., 2023). Today there are mainly large customers, like industrial plants and other electricity-intensive customers, that offer this type of flexibility (i.e. via contracts that allow the electricity provider to interrupt the service at a predefined number of hours per year). Also some households and small firms have a high and low-rate tariff that provides incentives for shifting certain activities. In addition, some utilities offer attractive tariffs for electricity used by heat pumps when they are allowed to shut down the heat pump at peak hours. There are even Swiss distribution grid operators who offer their private customers flexible tariffs whose price changes every 15 minutes depending on the load on the electricity grid (Cuony, 2023). In Switzerland, there are still regulatory challenges to overcome, before this potential can be fully exploited (e.g. with respect to the role of stationary and vehicle batteries) but the expectation is that such contracts are becoming more common place.

Many of the envisioned demand side options are so called ‘smart solutions’; i.e. some form of automatic control optimizing the different flexible electricity consumers (i.e. battery, heat pump, air conditioning, fridge). The installation of the appliances and controls will need to be triggered by respective suitable tariff incentives. Here again homeowners will have a more opportunities than tenants.

Prof. Dr. Hannes Weigt

University Basel

Peter Merian-Weg 6

4052 Basel