Most households in Britain pay a fixed rate for their electricity, which costs the same all day, every day. But the cost of providing electricity is not the same all the time - in fact, it varies dramatically, from hour to hour and day to day. This variation is becoming even more pronounced as the electricity system changes, with more renewable energy and more electric technologies in the home.

Paying a single rate for electricity is making our electricity bills higher than they need to be, for two reasons. First, a single price means electricity bills are heavily influenced by the most expensive periods, often the peak hours between 4:00pm and 7:00pm most days where electricity demand is highest. Second, keeping a single price removes the incentives for people to shift when they consume electricity, away from periods when it is most expensive (this is known as “flex”).

As a result, we think there are significant savings to be had by using “smart” tariffs, which reflect the different cost of electricity over time. This is especially true for households that have “electrification technologies” in their home including heat pumps, electric vehicles (EVs), batteries and solar. This is because electrification technologies can often avoid the peak periods where electricity is most expensive, for example, by charging an EV overnight.

Our aim in this project is to help more households switch to smart tariffs, and ensure those are the right smart tariffs for them. We think this can help achieve Nesta’s mission goal (to decarbonise UK homes) in two ways.

1. By making heat pumps and other low-carbon technologies cheaper to run and therefore more attractive to households.
2. By lowering electricity bills for all households, which would be good in its own right, but also create the conditions for more uptake of low-carbon technologies in homes.

We think there are several routes by which greater use of smart tariffs might help decarbonise homes, including:

• normalising smart tariffs among households, making them more likely to adopt low-carbon technologies later
• promoting innovation around tariffs and flexibility which can lead to better offers for low-carbon technologies
• lowering electricity system costs and carbon emissions through more flexible electricity use, which would make electricity universally cheaper and encourage more electrification

Our theory of change is that if we can identify how much different households could save with the right smart tariff, and we can identify what makes people more likely to switch, then we can influence more households to switch, and energy companies and policymakers to improve the number and types of tariff offered. 

To do this, we need to build a good understanding of how different tariffs would work for different people, and whether households actually find these tariffs acceptable and appealing.

The cost of electricity varies throughout the day for two main reasons.

• Network costs - the charges energy suppliers pay for using the transmission (TNuOS) and distribution (DuOS) grids are higher during the 4:00pm-7:00pm peak, reflecting higher demand on the grid in this period.
• Wholesale costs - the cost of generating electricity varies through time, depending on the available supply and demand. This variation is becoming larger as more renewables come onto the grid.

A typical household consumes more energy during peak periods, particularly the 4:00pm-7:00pm daily peak. As a result, standard variable tariffs and the Ofgem price cap have to be priced high enough to cover the high cost of this peak-time energy within a single rate.

This means that households that can use more of their electricity outside these peak times, or who can flex their use in response to price signals, can usually save money by being on a smart tariff. Electrification technologies tend to use electricity outside these peak periods and can often be used flexibly, making smart tariffs particularly suitable for households with them.

Smart tariffs may also cost energy suppliers less to provide, as they have to do less hedging of energy prices and face lower risks from being committed to a single, fixed-rate tariff.

We plan to run three closely related strands of work on this project.

1. Analysis

Our aim will be to build an open model that helps us estimate what different tariff propositions would cost for different households. Our key questions include:

• What are the likely energy bills savings from different smart time-of-use tariffs, low-carbon technologies and flexible energy behaviours across different kinds of households?
• What household and customer features, technology assets and flexible behaviours are most compatible with smart time-of-use tariffs and consumer-led flexibility? Who are the likely winners and losers?

2. Policy and market design

Our aim will be to propose policy changes that could increase uptake of smart tariffs and increase the savings households make from them. Our key questions include:

• Could the Ofgem price cap be changed in future to take account of variations in the cost of energy over time? Should the default price cap tariff become a smart tariff?
• What would a “smart social tariff”, which aimed to lower costs for lower income and more vulnerable households, look like?
• Are there policy or market changes that would lower electricity bills without negatively impacting households?

3. Customers and suppliers

Our aim will be to understand how consumers perceive different tariffs, understanding how features other than just price can make tariffs more or less appealing for different groups of people. We also want to understand what makes tariffs attractive for suppliers to offer. Our key questions include:

• What are the most effective ways to encourage people to use smart tariffs? 
• Are smart tariffs less suitable for some households, and are there any potential risks for vulnerable households? 
• Who do energy suppliers want to offer tariffs to, and how can they manage consumer tariff types in an increasingly flexible energy system?