Flexible energy pricing could save households £200 a year by 2040, but policy needs to head off risks for lower-income families

Moving away from the Ofgem fixed price cap and towards a flexible system of energy pricing – where costs vary according to region and time of day – could reduce the price of electricity by 4p/kWh by 2040, offering households savings of £200 a year, on average. But this approach also means families taking on more price risk, according to new Resolution Foundation research published today (Tuesday).

Flex Appeal – funded by the European Climate Foundation – notes that, as renewable electricity increasingly replaces carbon-intensive sources, our energy system will need to adapt to more variable generation. To make our energy system fit for the future, and in turn reduce costs for consumers, Britain must reform the way electricity is priced in both wholesale and retail markets.

The authors note that by incentivising families to move some electricity use out of peak times, varying time-of-use tariffs could reduce bills by an average of £160 per household per year by 2040. In wholesale markets, introducing a ‘zonal’ pricing system could reduce system costs by £3.7 billion a year, equivalent to £40 per household, and on top of the savings from flexible pricing, taking total savings to £200.

Currently, shifting energy consumption away from peak times through household appliances like dishwashers only has a very small impact on household bills. However, the potential savings will grow as electric vehicles (EVs) – which use lots of electricity but can be charged overnight – become more common. EVs are expected to account for almost three-quarters of new flexible capacity by 2030. On a flexible tariff, EV owners could save £120 a year on average by charging their vehicle overnight, compared to the price cap.

But, as EV adoption grows, owners who don’t shift their significant energy usage will push up peak demand, imposing greater costs on the system and inflating bills for everyone else. So, to ensure households with EVs and other technologies that can use electricity in off-peak times do so, the Government should give a strong nudge to consumers by setting a usage limit above which Ofgem’s current fixed-tariff price cap would not apply and shifting these households onto variable tariffs instead.

Variable tariffs, where the price of electricity changes through the day, can offer households big savings. But they also present risks for the estimated 590,000 low-income families with high energy use from heating and appliances. To protect these households, the Government should introduce a new Ofgem-regulated ‘time-of-use’ tariff that would have different price caps in peak and off-peak periods. Introducing a usage-cap alongside a regulated ‘time-of-use’ tariff provides suitable price protection for consumers, as well as incentives to reduce their bills in the energy system of tomorrow.

Zachary Leather, Economist at the Resolution Foundation, said:

“Britain’s net zero transition – in terms of both energy production and energy consumption – should be a cost of living win for consumers, but it will put more pressure on the electricity grid and could create more price volatility. Switching to flexible pricing for consumers could address these risks and reduce bills for everyone in the process.

“The Government should encourage households with flexible but high-energy use technologies like Electric Vehicles to shift their electricity usage out of the peak-time early evening period, so as to reduce both theirs and others’ energy bills. But it must also act to avoid the reforms penalising low-income households with unavoidable and inflexible electricity needs.

“Introducing a regulated ‘time-of-use tariff’ with different caps for peak and off-peak periods would help smooth out electricity supply and demand and bring overall costs down, while guaranteeing fair prices for high-energy use households.”