Ofgem is proposing plans to help consumers save up to £7bn by 2034 by cutting subsidies to some small-scale power generators that provide back-up energy during peak demand.
The UK's energy watchdog said the proposals will cut about £20 per household per year as the costs are included in network charges on consumers' bills. It said the changes will make the energy system more efficient overall.
Generators with less than 100 megatwatts can receive specific payments from suppliers for helping them to reduce some electricity transmission charges during peak times, and the payments are in addition to the price the generators get for selling their electricity.
"Our view is that the current level of payments is distorting the wholesale and capacity markets. If action isn’t taken now, this distortion will only escalate," Ofgem said in a statement.
Ofgem is pushing for an industry proposal to reduce payments from the current level of around £45 per kilowatt to around just £2 per kilowatt over the three years to 2020.
These so-called embedded generators have grown in popularity over the past few years thanks to rules that let them avoid the costs of using and maintaining the national transmission network.
The regulator said its proposed reforms will not have a material impact on security of supply, which is a growing concern in the UK as nuclear new builds face potential delays.
Ofgem is seeking further views before reaching its final decision in May.