Author: Andy Hackett, Head of Policy, Centre for Net Zero

The fact that Britain's new Prime Minister chose a tax cut on electricity as one of his first acts is a good sign that energy costs are high on the agenda. That’s unsurprising when the cost of living is polling as the no.1 issue for Britons and energy bills are named as their no.1 cost of living concern.[1] Many, including me, have pointed to big structural reasons why getting a handle on energy costs is difficult in the short term. The North Sea won’t save us, nor will renewables on their own, nor will rebranding “Clean Power” to “Cheap Power”.

There’s a growing willingness to think more radically about the energy system and a welcome focus on cutting costs for those who need it most. One proposal doing the rounds is the rising block tariff.[2] Designs vary, but in principle everyone receives an initial allowance of cheap electricity or gas, then the unit price rises as households consume more. High users subsidise low users, and standing charges could be reduced or abolished. That sounds fair because energy is an essential good (to a point), heavy users pay more, and redistribution can happen automatically through the tariff.

But utility economists have long been sceptical of the idea – not because they oppose redistribution, but because the block tariff muddles two separate tasks. Electricity prices should signal when power is scarce or abundant; social policy should decide who pays and who needs help. The block tariff tries to do both, and does it badly. This blog presents the economist’s case against the block tariff, why it goes against the direction of Britain’s electricity system, and whether there are better ways to achieve its objective.

Block tariffs break the cost causation link

Suppose two households each switch on a kettle at exactly the same moment. One household has already used 100 kWh that month, while the other has used 1000 kWh. Under a rising block tariff, the second household might pay significantly more for that identical unit of electricity. But nothing about the electricity system has changed. The generator produces the same electricity. The network carries it across the same wires. The supplier incurs essentially the same cost serving both customers. The electricity system has no idea which pricing block either household happens to be in.

What matters is when that kettle is switched on. On a windy Sunday afternoon, when electricity demand is low and renewable generation is abundant, the cost of supplying another unit of electricity may be close to zero. At 6pm on a cold winter weekday, the cost may be many times higher. This is one of the oldest principles of utility economics: prices should, wherever possible, reflect the cost of serving consumers.[3] Block tariffs break that link.

Figure 1. Half-hourly variation in electricity system costs, including non-energy costs, on a typical day in January 2026.

Source: Centre for Net Zero (2026), Internal Analysis, yet to be published; draws on data from Elexon, Ofgem, DESNZ.

Inefficient price signals are well-established in electricity systems. Hinchberger et al., looking at several US markets, show that while the marginal cost of electricity fluctuates hour by hour, consumers typically face much flatter prices. Time-of-use and critical peak pricing each recover only part of the efficiency lost under flat tariffs, but they at least move in the right direction: towards prices that better reflect system conditions.[4] Forthcoming analysis from Centre for Net Zero reaches a similar conclusion for Britain: tariffs that vary through the day provide better signals than tariffs fixed regardless of system conditions. This does not mean every household should immediately move to full real-time pricing – many consumers will prefer some predictability, and retailers will protect their customers from volatility. But the direction of travel is clear: electricity prices are highly temporal. Block tariffs move the other way.

Block tariffs make less sense in a renewables-based system

In fossil-based systems, the inefficiency created by block tariffs was more tolerable because generation costs were relatively stable and households had limited ability to respond. Today, the opposite is true. Renewable generation is increasing the gap between cheap and expensive hours, while EVs, heat pumps, batteries and automation are making it easier for demand to move between them.[5] CNZ estimates that flexible heat and transport demand, driven by the right price signals, can reduce system costs for everyone by billions of pounds every year – costs that ultimately fall on our bills.[6]

One clear illustration of why block tariffs don’t work today is the growing number of periods in which the system has more clean electricity than it can easily use and wholesale prices fall to zero or below. At these times, extra demand is not a problem to be penalised; it absorbs renewable power otherwise curtailed, helps address potential constraints on the grid, and creates value for consumers. In our recent demand turn-up paper, we estimated that if Scottish households were offered a realistic discount during periods of surplus wind generation, demand turn-up against Scottish network constraints could generate around £18 million of consumer surplus per year. These benefits are likely to grow as electrification and flexible technologies become more widespread.[7]

Figure 2: Using surplus electricity: estimated costs and benefits from demand turn-up against Scottish network constraints

Source: Centre for Net Zero (2026), Mobilising Electricity Demand in Periods of Renewable Abundance: Evidence from a Large-Scale Field Trial

Block tariffs work against electrification

One defence of rising block tariffs is that they encourage energy conservation by raising the price of marginal consumption. In practice, this is not necessarily the case. Landmark research by Koichiro Ito found that Californian households respond much more to average electricity prices than to the marginal price in the final block. That is unsurprising: even for the electricity-obsessed, it is hard to know what marginal price you will face at the end of the month. When consumers respond to average rather than marginal prices, increasing-block pricing may fail to reduce total consumption and can even increase it slightly.[8]

However, a more fundamental rebuttal to this argument is that we don’t want to discourage electricity use. Our decarbonisation strategy depends on households using more electricity, not less. Every heat pump and EV increases electricity demand – but a rising block tariff means the more successfully a household electrifies, the larger the share of its consumption that falls into higher-priced blocks. Beyond our emissions, as I have argued before, Britain’s low electricity demand is a structural issue for its power system and economy. We are investing in an electricity system on the basis of demand that has not yet materialised, putting billions of fixed grid costs onto consumers’ bills. A rising block tariff disincentivises electrification and exacerbates this ‘doom loop’.

Figure 3. Britain’s electricity demand is falling short of expectations: historic final electricity demand to 2024 and NESO scenario range to 2050

Source: Centre for Net Zero (2026), using DESNZ DUKES 2025. Table 1.1.5; NESO Future Energy Scenarios (2025).

Block tariffs are not good social policy either

Supporters of block tariffs might argue that all this misses the point. Perhaps block tariffs are inefficient, perhaps they don’t help decarbonisation – but that’s a price worth paying if the tariff becomes more progressive. Wealthier households generally consume more energy, so charging higher prices for higher consumption appears to be a simple way of redistributing costs.

The problem is that electricity consumption is only loosely related to income or wealth. What determines how much electricity a household uses is not simply how well off it is, but the characteristics of the home, the heating system, and the people living there. An affluent household may record low consumption because it lives alone, is often empty, owns a second property – or, increasingly, is installing solar panels and batteries to dramatically reduce grid imports. Conversely, a low-income household may use a great deal of electricity because it relies on electric heating in an inefficient home and cannot afford the technology that would lower its consumption.

Recent modelling by the UK Energy Research Centre illustrates this. Viewed only through average income groups, a rising block tariff can appear progressive: lower-income quintiles see average bill reductions while higher-income households pay slightly more. However, once households are divided between those in fuel poverty and those who are not, the picture changes. Lower-income households that are not fuel poor generally benefit because they consume relatively modest amounts of electricity. Meanwhile, many fuel-poor households in the same income groups see their bills rise because they use more electricity to achieve a basic standard of comfort.[9] Similar conclusions have been reached elsewhere: Severin Borenstein shows that Californian block tariffs can benefit affluent households with low consumption while penalising lower-income households with larger families or higher energy needs.[10]

Figure 4. UKERC modelling: average percentage change in annual electricity costs for fuel poor (FP) and non-fuel poor (NFP) households in different income quintiles under a rising block tariff

Source: UK Energy Research Centre (2026), Rising Block Tariffs: A Progressive Social Tariff or Heavily Damaging to Vulnerable Consumers?

Proponents of block tariffs do recognise these risks and generally factor them into policy design. But no tariff can fully account for the diversity of household circumstances, and ultimately electricity consumption remains a blunt proxy for financial need. This reflects a broader principle, articulated by the likes of Jan Tinbergen, that distinct policy objectives generally require distinct instruments.[11] If the aim is redistribution, tax and welfare systems are better suited to the task.

If such systems are imperfect, it’s not unreasonable for redistributive objectives to form part of energy policy – there is a strong case for ensuring vulnerable households can afford the energy they need. But if that is the objective, policymakers should be explicit and targeted about it. A more direct social tariff or bill support can target households on the basis of income, disability or other indicators of need. It’s more transparent, it can be adjusted as circumstances change, and means less distortion of the underlying price signals facing the rest of the electricity system.

Block tariffs being used elsewhere does not make them right for Britain

It’s true that block tariffs are common globally. A World Bank survey found a continued prevalence of block tariffs for residential customers, alongside relatively limited use of time-of-use pricing. Residential electricity block tariffs are, for example, widespread in China and India. Many African countries have used block tariffs to try to protect low-use households, support affordability and manage pressure on underfunded utilities.[12]

The results are mixed. In Africa, there’s evidence that rising block tariffs have been poorly targeted, with low-income households missing out or being pushed into higher blocks through shared meters or higher essential needs.[13] There are other contexts where it is more defensible. In China, residential electricity use has historically been a relatively small share of total demand, while higher-income households consume more electricity and therefore receive a disproportionate share of subsidies under flat residential tariffs. Sun and Lin argue that a carefully designed rising block tariff can improve the allocation of subsidies by protecting basic consumption while charging more for higher, more discretionary use.[14] In other words, block tariffs can look more attractive where the policy problem is how to ration or retarget an existing subsidy in a state-regulated electricity system.

But the lever that makes this more workable in China is unavailable in Britain. Industrial and commercial users have long paid more so that households can pay less – a deliberate, state-directed cross-subsidy that has helped keep average household electricity prices at around one-fifth of those in the UK.[15] In a system where industrial electricity demand is more than three times residential demand, that is plausible way to recover costs.[16] Britain’s position is close to the opposite: industrial demand is around one-fifth lower than residential demand, while industrial electricity prices are already a major competitiveness concern which successive governments have been trying to address.

Figure 5. Structure of electricity consumption by sector in seven countries in 2020

Source: Rocky Mountain Institute (2023), using IEA data, Unlocking Demand-Side Flexibility in China: Current Status and Potential of Demand Response in the Industrial Sector

Power market reforms in China also show the trend is towards more, not less, time-varying pricing. In 2021 China’s National Development and Reform Commission (NDRC) encouraged strengthening time-of-use pricing for households.[17] Meanwhile, India is moving towards time-of-day pricing for more consumers, reinforcing the wider shift towards temporal price signals as renewable generation grows. Implementation varies by state, but the direction of travel is the same everywhere – as renewable generation becomes more variable, price signals should help shift demand to when it's cheapest to supply.[18]

There are better ways to cut bills

Proponents of a UK block tariff haven’t ignored all these issues. But once a block tariff needs multiple add-ons, it stops looking like an elegant solution and starts looking like a complicated workaround for a problem that can be addressed more directly. For electricity, the fundamental issue remains: it prices the wrong thing. That means it tries to solve a distributional problem by distorting the price signal we increasingly need to run a clean and cheap electricity system. Perhaps there’s a better case for some form of block pricing on gas – but even there, consumption remains a poor proxy for financial need.

The better and simpler action – and one many in the sector, including us, have been arguing for – is to move more policy costs from electricity bills into general taxation, so the costs of the electricity system are funded more progressively. This would also support flexibility by reducing the wedge between the true marginal cost of electricity and what consumers see. It would, of course, require difficult fiscal choices, and there are live debates about whether some costs could be recovered from excess returns elsewhere in the energy sector.

If the objective – perhaps in addition to the levy reform – is to cut energy bills for households in hardship, then use energy policy for social policy openly: introduce a targeted social tariff or direct bill support. If that is not funded through taxation, it will be funded through a cross-subsidy within energy bills. In practice, this means requiring suppliers to lower rates for eligible low-income households and recover the cost from other consumers. That debate can be had, but it’s at least more transparent and targeted than a universal block tariff.

More fundamentally, if the government wants to bring bills down in the long term, it should focus on the things that actually lower system and household costs permanently: accelerate electrification to spread fixed system costs; reform markets to maximise the use of cheap generation; make electricity networks more efficient and cheaper to finance, including through stronger regulation and greater public control where needed; and fund home upgrades like insulation, solar panels and batteries in fuel-poor homes to cut their energy costs.

Block tariffs are appealing because they sound like a neat answer to a difficult question. But energy policy is already full of second-best fixes. Adding another one is the wrong kind of radical.

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[1] More in Common, Britons and Energy Bills Tracker (2026)

[2] See proposals from the New Economics Foundation (2023), National Energy Guarantee, and the Joseph Rowntree Foundation (2026), An Affordable Energy Guarantee

[3] Bonbright, J.C. (1961) Principles of Public Utility Rates. New York: Columbia University Press.; Borenstein, S. (2012) ‘The redistributional impact of nonlinear electricity pricing’, American Economic Journal: Economic Policy, 4(3), pp. 56–90. doi: 10.1257/pol.4.3.56

[4] Hinchberger, A.J., Jacobsen, M.R., Knittel, C.R., Sallee, J.M. and van Benthem, A.A. (2024) ‘The efficiency of dynamic electricity prices’, NBER Working Paper No. 32995. Cambridge, MA: National Bureau of Economic Research.

[5] Metcalfe et al. (2025), ‘AI in charge: large-scale experimental evidence on electric vehicle charging demand’, Working paper, Centre for Net Zero

[6] Franken et al. (2025), ‘Power system benefits of simultaneous domestic transport and heating demand flexibility in Great Britain’s energy transition’, Applied Energy, 377, 124522.

[7] Lopez Garcia et al (2026) ‘A demand-side alternative to renewable curtailment: natural field experimental evidence from two countries’. Working paper, Centre for Net Zero

[8] Ito, K. (2014) ‘Do consumers respond to marginal or average price? Evidence from nonlinear electricity pricing’, American Economic Review, 104(2), pp. 537–563.

[9] Gonzalez-Martinez, P., Calvillo Munoz, C., Turner, K., Katris, A. and Zhou, L. (2026) Rising Block Tariffs: A Progressive Social Tariff or Damaging to Vulnerable Consumers? London: UK Energy Research Centre.

[10] Borenstein, S. (2014) ‘Rationalizing California’s residential electricity rates’, Energy Institute Blog, Energy Institute at Haas, 29 September. Available at: Energy Institute at Haas website.

[11] Tinbergen, J. (1952) On the Theory of Economic Policy. Amsterdam: North-Holland.

[12] Foster, V. and Witte, S. (2020) Falling Short: A Global Survey of Electricity Tariff Design. Policy Research Working Paper No. 9174, World Bank; Gorade, P., Najeeb, A. and Rao, A.B. (2024) ‘Tariff structures for residential electricity consumption in India: an analysis of disparities and effect on consumption’, in Advances in Clean Energy and Sustainability, Volume 2; Central Electricity Authority (2025) Tariff and Duty of Electricity Supply in India, Central Electricity Authority, Ministry of Power, Government of India.

[13] Klug, T.W., Beyene, A.D., Meles, T.H., Toman, M.A., Hassen, S., Hou, M., Klooss, B., Mekonnen, A. and Jeuland, M. (2022) ‘A review of impacts of electricity tariff reform in Africa’, Energy Policy

[14] Sun, C. and Lin, B. (2013) ‘Reforming residential electricity tariff in China: block tariffs pricing approach’, Energy Policy, 60, pp. 741–752

[15] Statista (2026) ‘Household electricity prices worldwide as of September 2025, by country’ Available at: https://www.statista.com/statistics/263492/electricity-prices-in-selected-countries/

[16] RMI (2023) ‘Unlocking Demand-Side Flexibility in China’ Available at: https://rmi.org/resources/unlocking-demand-side-flexibility-in-china/

[17] National Development and Reform Commission (2021) ‘Notice on Further Improving the Time-of-Use Electricity Pricing Mechanism (NDRC Price Document [2021] No. 1093)’

[18] Purohit, S., Singh, R. and Sikdar, M. (2025) ‘How can electricity tariff reforms empower Indian households?’, Available at: https://www.ceew.in/blogs/how-can-electricity-tariff-reforms-empower-indian-households