Household energy bills could fall under proposed change to how electricity is priced
Households could pay less for electricity if tariffs automatically reflected when power is cheapest to produce, with researchers saying electric vehicle owners and homes able to shift energy use could benefit most.
Household electricity bills could fall if time-varying tariffs became the default, according to a report urging the Government to improve the efficiency of the UK’s power system.
Researchers said consumers could be encouraged to charge electric vehicles or run washing machines when electricity is cheapest to supply. The potential savings could increase as more homes adopt electric vehicles and technology that automatically moves electricity use to cheaper periods.
The report, from the Institute for Fiscal Studies (IFS) and LSE, was published as part of the IFS Green Budget and funded by the Nuffield Foundation.
It said the cost of producing electricity varies “a lot” depending on the time and location, but most households are not charged prices reflecting those differences.
In Scotland, frequent windy weather means electricity can sometimes be “effectively free”. At points, so much power is generated that the grid operator must pay for wind turbines to be turned off to prevent the network from being overloaded.
At other times, particularly in the south of England, expensive gas generators must be paid to increase supply.
The Government has ruled out regional electricity markets, also known as zonal pricing. However, the report outlined other ways of linking consumers’ bills more closely to production costs, including making the default household tariff time-varying.
It also suggested offering relatively higher subsidies for electric heat pumps in areas where electricity is cheaper to produce. Higher solar panel subsidies could be targeted at areas where demand is more likely to be met by gas generators.
The report warned that the cost of balancing electricity supply and demand is projected to double in real terms by the end of the decade, reaching £7 billion.
Bobbie Upton, research economist at the IFS and a co-author of the report, said: “Encouraging greater take-up of time-varying electricity prices could lower electricity bills for consumers with minimal cost to the Government.
“The extent of savings would depend on how enthusiastically consumers adopted time-varying contracts and then adjusted when they consumed electricity.
“But evidence suggests savings are possible, with the potential savings increasing significantly as more households adopt electric vehicles and technology that automatically shifts consumption to times when prices are low.
“Looking ahead, high electricity prices look set to be with us for many years to come. Improving the efficiency of the electricity market would have a long-run pay-off.”
The study also argued that a “more balanced” approach to net zero, relying less heavily on electricity decarbonisation during the rest of this decade than currently planned, would reduce the overall cost of decarbonisation.
Mark Franks, director of welfare at the Nuffield Foundation, said: “Electricity prices matter for all households, but they are particularly important for those on low incomes.
“Energy bills account for a much higher proportion of spending among poorer households, and uncertainty about possible future price rises creates anxiety within families already operating with very little financial headroom.
“Any credible options for reducing the costs faced by consumers, particularly the most vulnerable, should therefore be considered carefully by government.”