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

24th June 2025

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 (Tuesday24 June 2025).

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."

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.

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.

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.

Read the full report HERE
Pdf 30 Pages