Consumers’ electricity bills could fall if the government promoted time-varying prices

Government should promote the take-up of contracts with time-varying electricity prices in order to help British consumers access lower electricity bills. More broadly – and important over the long run – the government could help ease the cost-of-living pressures caused by high electricity prices by taking action to improve the efficiency of the UK’s electricity system.

These are among the conclusions of a new IFS and LSE report, published as part of the IFS Green Budget and funded by the Nuffield Foundation.  

The report shows that the costs of producing electricity vary a lot over time and place. When and where it is very windy, as is often the case in Scotland, electricity can be effectively free; in fact, there can be so much electricity that the grid operator must pay to have wind turbines turned off to avoid overloading the grid. At other times, and particularly in the South of England, it must pay expensive gas generators to boost supply.  

Most consumers do not face electricity prices that reflect these differences. If they did, this would give stronger incentives for consumers to use electricity when it is cheaper to supply – for example, charging their electric vehicles or running their washing machines when it is cheapest to do so, bringing down bills. Costs to balance demand and supply are projected to double in real terms by the end of the decade to £7 billion: time- and place-varying prices could help prevent bills rising further.

While the government has ruled out regional electricity markets (zonal pricing), other options for promoting a closer link between the costs of electricity production and consumption include:

• Making the default household electricity tariff time-varying.
• Varying the generosity of subsidies by area. This could include having relatively higher subsidies for electric heat pumps in areas where the cost of producing electricity is low and relatively higher subsidies for solar panels in areas where demand is more likely to be met by gas generators.
• Adjusting subsidies – provided through Contracts for Difference – for new renewable power generation to better reflect that additional renewable capacity is not equally valuable in all parts of the country.  

The report also examines how the range of taxes and levies put on electricity bills – some of which are linked to the grid’s transition to net zero – currently contribute to higher electricity prices. It concludes that a more balanced approach to net zero – which would involve relying less on the decarbonisation of electricity for the rest of this decade than is currently planned – would reduce the cost of achieving overall decarbonisation.

Bobbie Upton, Research Economist at the Institute for Fiscal Studies 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.’

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.’