TLDR: To understand what Dicey meant, consider the context in which Dicey was writing those paragraphs. Basically, he thought that Irish home rule would be a disaster for the UK, so he opposed it every way possible, which generally meant interpreting the "electoral body" as expressing its wishes in some rather indirect ways at times, e.g. through the unelected Lords opposing things they thought were unconstitutional, and thus forcing elections that Dicey thought were proxy-referendums. In his later writings Dicey would more explicitly support actual referendums as a way to break such deadlocks between the chambers. (A few commentators have interpreted that approach of Dicey was wanting to copy [part of] the American system, and alas this is the first quote I found on the matter, but there are more straightforward ways to explain his position[s], in the later quotes below.)
Sugarman, David (1983). "Review: The Legal Boundaries of Liberty: Dicey, Liberalism and Legal Science". The Modern Law Review. 46 (1): 102–111. pdf
Sugarman's quotes don't answer your question, but contextualizes Dicey's approach to constitutional matters; he was described as being enamoured with the US constitutionalism:
Dicey defined the political problem of the age as ". . . how to form conservative democracies. . .to give to constitutions resting on the will of the people the stability and permanence which has hitherto been found only in monarchical or aristocratic states ... The plain truth is that ... the American republic affords the best example of a conservative democracy; and now that England is becoming democratic, respectable Englishmen are beginning to consider whether the constitution of the United States may not afford means by which . . . may be preserved the political conservatism dear and habitual to the governing classes of England." The basic conservatism underlying Dicey's constitutional writings and his " Americomania " is exemplified in three specific examples. First, his growing interest in the referendum as a device to mitigate the full impact of parliamentary sovereignty. Secondly, Dicey attributed the stability and conservatism of the United States to its legalistic spirit. In particular, he envied the way in which the Rule of Law, which in Britain grew haphazardly through custom, precedent and convention, was deified in America and enshrined within its fundamental constitution." There law rather than government held the federation together, judges not politicians were the ultimate arbiters, and litigation had replaced legislation. The prospect of a vast nation ran on the lines of a solicitor's office in Lincoln's Inn must have been very satisfying to Dicey and many of his legal contemporaries. In short, Dicey and other "old Liberals" regarded American constitutionalism as the consummation of the boundary theory of the common law.
[...] From this perspective, Dicey's Law of the Constitution was an attempt to reduce Britain's unwritten constitution to a partially written code. Dicey's Rule of Law endeavoured to create a new procedural natural law or Bill of rights which could be used to ensure that legal change was slow paced and conservative.
[...] Dicey, like most people, was not internally consistent [...] He could simultaneously argue for the supremacy of Parliament and yet suggest that if an election is not called before the enactment of the Home Rule Bill it would be unconstitutional. Although a rigid dogmatist, Dicey was on occasions able to transcend this straitjacket and, no doubt unwittingly, challenge the precepts he also sought to defend.
So unless he was explicit somewhere else what he meant precisely by that phrase/sentence, it's gonna be down to guesses/inferences from other parts of his work(s), which (as noted) aren't known for their relative consistency. So at some point it becomes a Rorschach test. (Yes he seems to have favored referendums, in theory, but he opposed the Irish home rule, etc.)
THERE is an apparent paradox between Dicey's treatment of parliamentary sovereignty as the central premise of the British constitution and his advocacy of the referendum, a tool of popular sovereignty. Bogdanor wrote:
[i]t is paradoxical that Dicey should have been the first to advocate the referendum in Britain, for he was the author of the classic work Introduction to the Study of the Law of the Constitution (1885). Foremost among the principles there identified as central to the British Constitution was the sovereignty of Parliament—a principle generally held to preclude the referendum.
Cosgrove, who wrote an authoritative biography on Dicey, explained that Dicey turned to the referendum in his search for a device that would prevent Home Rule. Dicey's commitment to defeat Home Rule, he wrote, distorted his judgment. However, we assert that Dicey's advocacy of the referendum was consistent with his constitutional theory. It represented a personal evolutionary process that followed closely the evolution of the British constitution. Most importantly, the referendum was compatible with the British constitution, as Dicey perceived it. He believed the constitution was in practice, though not in theory, based on popular and not parliamentary sovereignty.
Dicey's evolutionary process consisted of three phases. At first, he identified parliamentary sovereignty as the fundamental norm of the British constitution. But, he distinguished between Parliament as the legal sovereign and the People as the political sovereign. Later, primarily after 1890, when his first article on the referendum appeared, he advocated the adoption of the referendum, thus, desiring to officially make the People the legal sovereign. Finally, after the passage of the Parliament Act 1911, in a desperate move he was willing to recognise the People as the legal sovereign even in the absence of a referendum.
So yeah, Rorschach test. Different commenters read Dicey differently. At least the latter article finds a more obscure letter of Dicey in which he explained some of his views at one point:
Until 1911, even though he spoke of parliamentary sovereignty, Dicey distinguished between Parliament as the legal sovereign and the People as the political sovereign. Scholars understood this formulation of political sovereignty to mean only that in the long run the People's will prevails through elections, not that the People decide on specific issues. That is, they treated Dicey's formulation as consistent with a constitutional system that grants plenary lawmaking authority to the winner of the last election; i.e., a monist system. However, Dicey meant more than that. He also wrote that in practice constitutional change cannot pass in Britain without the People's consent.
In a letter to the Unionist journalist Leo Maxse, written in January 1895, Dicey distinguished between the British treatment of executive (normal) and constitutional issues. On executive issues, he wrote, the will of even a small majority of the Commons was decisive. However, on constitutional issues, the British constitutional practice demanded that the permanent will of the People be clearly expressed. Therefore, a small majority of the Commons was not authorised to pass constitutional changes. In his words, "[i]t is I think of immense importance that people should realise that a small & transitory political majority, though it necessarily exercises the powers, has not the authority of the nation. On this point my mind is becoming more and more clear". He continued:
In Executive matters I hold that the Government of the day ought even though put into office by but a small majority, to be whilst it continues the Government, in general supported by good citizens. My reason is this, viz: that in Executive matters the majority must of necessity be treated as the organ of the nation, otherwise the action of the nation is at every turn weakened. A party which is not in a position to carry on the administration ought not to hamper the action of the Ministers of the day. Moreover matters of administration are transitory. On the other hand on matters of constitutional change I do not think a small majority has any moral right to act with vigour. The presumption is in favour of the existing state of affairs, because on the whole it may be assumed to be the permanent will of the nation. Add to this that a constitutional change once made is, or ought to be, final, and therefore ought not to be made by any body of men who do not clearly represent the final will of the nation. Till modern times this has been the practice, though not the theory, of English constitutional government, and it is, as I have pointed out, recognised as a democratic principle in every true democracy.
Dicey attested here that "the practice, though not the theory, of English constitutional government" was that of dualism. By dualism, we mean a constitutional system that distinguishes between constitutional and regular law by demanding the People's explicit, unequivocal and sustained approval for constitutional change. In other words, his discussion of the People as the sovereign cannot be taken to mean, as the scholars understood, that the People's sovereignty is only theoretical.
The historical context of those writings of Dicey is important. See "Democracy in Switzerland" (1890) 171 Edinburgh Review 113, 141 (unsigned) [hereinafter cited as Dicey, "Democracy"].
Between 1832 and 1911, Britain conditioned the passage of disputed constitutional measures on the People's consent. When the Lower House proposed fundamental constitutional change, the Upper House initially vetoed it. The Lords justified the exercise of their veto, explaining that they were referring the constitutional issue to the People's decision at election. The next election was fought on the constitutional issue. Only if the promoters of constitutional change won the election, the Lords accepted the result as expressing the People's ratification of the measure and allowed the change to be enacted into law.
Footnote: For a full description of the dualist Britain between 1832 and 1911, see Rivka Weill, The Anglo-American Constitutional Model: Why The British and American Constitutional Systems Are Not As Different As Most Think (JSD Thesis, Yale Law School, 2002) (available at Yale Law School Library).
[...]
Under this structure, the sovereign Parliament consisted of four bodies instead of the traditional three. In addition to the Commons, the Lords and the Crown, the People emerged as the fourth and decisive body. Without the People's consent, no fundamental constitutional change could pass into law. Dicey believed that "[w]e have introduced into our constitution the spirit, though not as yet the form, of the referendum".
Dicey was even more adamant in A.V. Dicey, "The Parliament Act, 1911, and the Destruction of All Constitutional Safeguards" in W.R. Anson et al. (eds.), The Rights of Citizenship: A Survey of Safeguards for the People (London 1912) 81, 85-86 [hereinafter cited as Dicey, "The Parliament Act"].
[t]he legislative authority of the House of Lords meant, and was up to 1911 understood to mean, that the House had the power, and was under the obligation to reject any Bill of first rate importance which the House reasonably and bona fide believed to be opposed to the permanent will of the country. ..no one till 1910 and 1911 seriously disputed the doctrine that the House of Lords in modern times had the right to demand an appeal to the people whenever on any great subject of legislation the will of the electorate was uncertain or unknown.
And Dicey used this line of argumentation that the British people rejected Irish home rule by this kind of "referendum"
Dicey believed that the People expressed their veto of Home Rule in the 1886 election. Before the election, Gladstone attempted to pass the first Home Rule bill. However, he failed to gain support even in the Lower House, with ninety-three members of his own party voting against it. Parliament dissolved over the bill, and the election confirmed, according to Dicey, Gladstone's lack of mandate regarding Home Rule. Dicey asserted that the People vetoed Home Rule once again in the 1895 election. After Gladstone's victory at the 1892 election, Gladstone attempted to pass Home Rule anew. This time the bill passed the Lower House, but the Lords vetoed it by an overwhelming majority. Dicey believed the 1895 election was fought on the issue and the Conservatives' decisive victory at the polls proved that the Lords rather than the Commons represented the will of the People on this issue.
This condemnation should never be forgotten; it is of infinite significance, it means that at a great crisis in the fortunes of England, the hereditary House of Lords represented, whilst the elected House of Commons misrepresented, the will of the nation.
[footnote:] Dicey, "The Parliament Act", note 12 above, p. 86.
So yeah, Dicey held that before the "Destruction of All Constitutional Safeguards" of 1911, the Lords were basically enforcing a referendum-in-spirit whenever they opposed a matter and [thus] forced elections.
As @zhantongz pointed out to me in a comment below, the 1885 passage from the OP's question is also framed in this context of the Lords-Commons conflict resolution. You should probably look up papers citing the first sentence of your quote
How, it may be said, is the “point” [...] the creation of new Peers?"
(or Weill's full thesis, on which this paper appears to be based) to see where the academic dispute around how to interpret Dicey's writings on the constitutional conventions ended up. But interpreting them out of the historical context can lead to the wrong conclusion(s).
N.B. later Weill's paper notes
The first edition of Dicey's classic treatise, Introduction to the Study of the Law of the Constitution (1885), did not mention the referendum. Only later did he start advocating it. Dicey did not support the referendum out of great belief in it, but rather out of a loss of confidence in Parliament. In an 1894 letter to J. St. Loe Strachey, the Unionist editor of the Spectator, he wrote, "I am sure we are right in agitating for the Referendum. Wherever I go I find it popular. Personally I think that I should have preferred real Parliamentary government as it existed up to 1868."
Somewhat more ironically, as Weill notes (but I'll spare you the quotes on that), Dicey thought that neither major party represented the will of the people on the matter of Free Trade. He thought that if put to a referendum that matter would have succeed despite opposition from both major parties.
