What are smart tariffs and how can they save you money?

“Smart tariffs” is the term we are using to describe time-of-use electricity tariffs, where the price paid for the power you consume varies depending on the time of day.

Many people will already be aware of Economy 7 tariffs, which were promoted from the late 1970s to provide consumers with electric heating with seven hours of highly discounted electricity in the middle of the night. Today, time-of-use tariffs are increasingly being offered by energy suppliers to cater for people who are buying electric vehicles, heat pumps, and other devices that substantially increase their electricity use.

During our research we have been shocked by how complicated this has all become. Some of these tariffs are marketed for a single device - such as cheap overnight or daytime power for your electric vehicle - while others sync with multiple devices, such as solar panels and battery storage, to optimise the import and export of power between your home and the grid.

The smartest, most transparent - and arguably the fairest - tariffs track the wholesale price of electricity and directly pass this on via a retail price that is different for every half hour. A couple of more innovative energy suppliers offer these “dynamic variable” time-of-use tariffs, where they publish the rate for the next 24-hour period at a set time on each day.

So why can switching to a smart tariff save you money? Well, wholesale electricity prices vary extensively depending on the total level of demand for electricity and other factors like the temperature and the availability of power from wind and solar. To provide a standard, flat electricity tariff, energy companies need to account for the fact that many of us will use power between 4-7pm, when people come home and start cooking and using other appliances. These peak hours lead to the highest wholesale electricity prices - and the most carbon-intensive generation - because it is when the grid needs to draw on all available generators, including more expensive fossil fuel plants.

However, smart tariffs take a different approach: they reward people who are able to shift their consumption into off-peak hours - and the results are significant. With dynamic smart tariffs (the ones based on the wholesale price of electricity), bills can be 50% less than what people on a fixed tariff would pay. And shifting and flexing one's electricity consumption has a second benefit: you are actively contributing to a greener electricity system by helping to absorb more solar and wind generation, and reducing the need for peaker fossil fuel plants.

It is critical that we electrify virtually all of our energy consumption to respond to the climate crisis, as this is the only way to harness our abundant resources of wind and solar: today electricity meets just 22% of total energy demand, with the rest coming from fossil fuels. As a result the UK will be adding huge numbers of electric vehicles, heat pumps, solar, and battery storage to homes across the country - a monumental challenge, but also a huge opportunity for greater energy independence and lower costs. For those already on this electrification journey a time-of-use tariff is likely a smart choice, especially if combined with efforts to become more flexible.

Determining the right smart tariff for your circumstances is not straightforward, as every home has a unique energy profile. This is where we can help! Use our smart tariff comparison service to figure out the optimum tariff for your home, save money, and support the transition to a greener energy system.

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