UK households could cut bills with time‑varying tariffs
A new report from the Institute for Fiscal Studies and the London School of Economics argues that UK households could lower their electricity bills if the government promoted flexible, time‑varying tariffs. By aligning domestic rates with the real cost of power generation—free wind in Scotland and…
By Felo News Desk · Published
The latest research from the Institute for Fiscal Studies (IFS) and the London School of Economics (LSE), funded by the Nuffield Foundation, suggests that British households could see a noticeable drop in their electricity bills if the government moved away from flat‑rate tariffs and embraced time‑varying pricing. The report, part of the IFS Green Budget series, argues that the current system ignores the huge fluctuations in generation costs that depend on both location and time of day.
Why the cost of power varies across the UK
In Scotland, frequent high winds mean that wind farms often produce more electricity than the grid can absorb. When this happens, the National Grid is forced to pay wind operators to shut down turbines to keep the system stable. In contrast, the south of England—where demand peaks in the evenings—relies on costly gas‑fired generators to meet short‑term shortages. These divergent cost structures mean that the price of electricity on the wholesale market can swing dramatically over a single day.
Yet most domestic customers pay a flat rate that does not reflect these swings. The IFS‑LSE study found that the vast majority of households remain on standard tariffs that ignore the real‑time cost of power, leaving consumers exposed to price spikes that could have been avoided with smarter usage patterns.
How time‑varying tariffs could help
Time‑varying tariffs would charge customers more during peak periods—when gas generators are running—and less when the grid is supplied by cheap wind. The study shows that if households were encouraged to shift energy‑intensive activities—such as charging electric vehicles, running washing machines or heating water—to off‑peak hours, overall consumer bills would fall.
“Encouraging greater take‑up of time‑varying electricity prices could lower electricity bills for consumers with minimal cost to the Government,” said Bobbie Upton, research economist at the IFS and co‑author of the report. “The extent of savings would depend on how enthusiastically consumers adopted time‑varying contracts and then adjusted when they consumed electricity.”
In practice, this could mean a simple switch from a flat‑rate contract to a tariff that varies by time of day, or the adoption of smart meters that automatically adjust usage based on price signals. The report notes that the savings potential increases as more households adopt electric vehicles and technologies that can automatically shift consumption to low‑price periods.
Targeted subsidies to support low‑cost generation
Beyond tariff reform, the authors recommend targeted subsidies to accelerate the uptake of technologies that align with local generation profiles. In regions where wind power is abundant and cheap, higher subsidies for electric heat pumps could reduce household heating costs. Conversely, in areas where gas generators dominate, larger solar panel subsidies would help shift demand away from expensive peak periods.
Mark Franks, director of welfare at the Nuffield Foundation, highlighted the importance of these measures for low‑income households: “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.”
Broader implications for the UK electricity system
The report also looks beyond individual bills. It estimates that balancing costs—expenses incurred to keep supply and demand in sync—are expected to double in real terms by the end of the decade, reaching around £7 billion. Modernising the electricity market to better match supply with demand could therefore provide a long‑term payoff for the entire system.
Furthermore, the authors argue that a “more balanced” approach to net‑zero—relying less on rapid decarbonisation of electricity in the next decade than currently planned—could lower the total cost of achieving overall decarbonisation. By aligning consumer behaviour with real‑time generation costs, the UK could reduce both household bills and the overall economic burden of the energy transition.
While the government has ruled out localised electricity markets or zonal pricing models, the study shows that there are still practical ways to bring tariffs closer to the true cost of power. The next step will be to decide whether to roll out time‑varying tariffs nationwide and how best to support vulnerable households through targeted subsidies and smart‑metering initiatives.
As the UK faces higher electricity prices this winter, the report offers a clear path: align domestic tariffs with the real cost of generation, encourage off‑peak usage, and support low‑cost generation technologies. Together, these measures could ease the cost‑of‑living pressure on households while advancing the country’s decarbonisation goals.
What’s next?
Government officials will need to weigh the benefits of time‑varying tariffs against the administrative costs of implementing them. If the policy is adopted, the IFS and LSE will likely monitor the impact on consumer behaviour and overall system efficiency. Meanwhile, households can start preparing by installing smart meters and exploring flexible tariff options offered by their suppliers.
Ultimately, the study underscores that smarter pricing could be a win‑win for consumers and the UK’s energy system, reducing bills while supporting the transition to cleaner power.
“Improving the efficiency of the electricity market would have a long‑run pay‑off,” added Upton, noting that high prices are likely to persist for many years if the current system remains unchanged.
Key facts
- Time‑varying tariffs could lower UK household bills by aligning prices with real‑time generation costs.
- Wind power in Scotland is often effectively free, forcing the grid to pay turbines to shut down.
- Gas‑fired generators drive high costs in the south during peak demand.
- Targeted subsidies for heat pumps and solar panels can further reduce bills in low‑cost regions.
- Balancing costs are projected to double to £7 billion by decade’s end.
- A more balanced decarbonisation strategy could lower overall costs.
Why it matters
The findings highlight a practical way to reduce household energy costs while also easing pressure on the national grid, offering a win‑win for consumers and the environment.
Frequently asked questions
What are time‑varying tariffs?
They are electricity rates that change throughout the day to reflect the real cost of generating power, charging more during peak periods and less during off‑peak times.
Will households need new equipment?
Many suppliers already offer smart meters that can support time‑varying tariffs; households may need to switch contracts or install new meters if they don’t already have them.
How will low‑income households benefit?
Lower bills and targeted subsidies for heat pumps and solar panels can reduce the proportion of income spent on energy, easing financial pressure.
Sources
- [1] independent.co.uk — originally reported as “Energy bills could fall if households use electricity at the cheaper times”
