Net zero
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Time use

Flex appeal

How to reform electricity pricing for a cleaner and cheaper energy system

Zachary Leather
Zachary Leather
Jonathan Marshall
Jonathan Marshall

This report examines how Britain’s electricity system must transform to achieve net zero emissions while keeping energy affordable for households. It provides a comprehensive assessment of the reforms needed to move from a demand-led electricity system to one that responds to renewable energy supply, focusing on the implications for household bills and consumer protection.
The report finds that locational and time-of-use electricity pricing could save up to £18 billion annually by 2040, reducing bills by around £200 per household. However, these changes risk exposing vulnerable households to price volatility and regional disparities. The report recommends targeted reforms that balance exposure to price signals with consumer protection, including averaging regional prices for domestic consumers and introducing regulated time-of-use tariffs. Getting this balance right is crucial for delivering both net zero commitments and lower energy bills.

Key findings

  • Achieving net zero requires fundamental electricity market reform: Moving to renewable energy means shifting from a system where supply responds to demand to one where demand must flex more around variable wind and solar generation.
  • Price signals are essential but carry risks: Allowing electricity prices to vary by location could save £3.7 billion annually, while time-of-use pricing could save £14 billion by 2040 – but both risk higher bills for some households.
  • Electric vehicles are key to unlocking savings: EVs will account for three-quarters of new household flexibility capacity by 2030, with typical EV owners able to save £120 annually by charging overnight.
  • Encouraging EV owners to switch their energy use is crucial to ensure they don’t raise bills for everyone else. Withdrawing the fixed-price cap from those with high electricity use 5MWh consumption threshold would be a strong nudge to switch to a variable price tariff.
  • But a usage cap of 5MWh would affect 2.5 million households, including 79% of those with electric heating and 33% of large families. So consumer protections is needed, and the price cap should be adapted for a variable world by introducing a regulated ‘time-of-use’ tariff.

Recommendations

  • Remove fixed-price cap protection for high-consumption households: Set a 5MWh annual threshold above which suppliers need not offer fixed-price tariffs, pushing high users onto time-of-use pricing.
  • Create a regulated time-of-use tariff: Introduce Ofgem-regulated tariffs with different peak and off-peak price caps to provide consumer protection while incentivising demand flexibility.
  • Implement zonal wholesale pricing while protecting domestic consumers: electricity prices could be averaged across regions for households (as Italy does) to capture efficiency gains without risking big bill increases for some regions.
  • Consider using GB Energy to mitigate investment risks: If zonal pricing increases capital costs, the Government may GB Energy’s balance sheet to de-risk renewable investments and smooth returns.

Further reading

Flex appeal
How to reform electricity pricing for a cleaner and cheaper energy system
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Zachary Leather, Jonathan Marshall
Turning up the heat
Making the home heating transition work for low-income households
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Zachary Leather, Jonathan Marshall
The grass is greener on the net zero side
What the Seventh Carbon Budget tells us about the net zero transition
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Zachary Leather

https://doi.org/10.63492/ccih723

Zachary Leather
Zachary Leather Economist
Jonathan Marshall
Jonathan Marshall Principal Economist