Household electricity bills could fall if time-varying prices promoted – report

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Household electricity bills could fall if the Government promoted the take-up of time-varying prices, according to a report.

The costs of producing electricity vary “a lot” over time and place, but most consumers do not face prices that reflect these differences, said the Institute for Fiscal Studies (IFS) and LSE report, published as part of the IFS Green Budget and funded by the Nuffield Foundation.

The study said electricity in Scotland could often be “effectively free” because of frequent windy weather, to the point that there could 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.

While the Government has ruled out regional electricity markets – or zonal pricing – the report suggests other options for promoting a closer link between the costs of electricity production and consumption, including making the default household electricity tariff time-varying.

It also suggests relatively higher subsidies for electric heat pumps in areas where the cost of producing electricity is low and higher subsidies for solar panels in areas where demand is more likely to be met by gas generators.

Reflecting differences in household bills could 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 and bringing down bills, the report concluded.

More broadly, 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, it said.

The cost of balancing demand and supply are projected to double in real terms by the end of the decade to £7 billion, according to figures in the report.

It also 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 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.”

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.’