Fossil fuel prices could be separated from the costs of electricity produced by renewables, radically reducing the country’s exposure to volatile global gas markets.
The Government has launched a review of the UK’s electricity market, which includes a consultation on a number of proposals for reforming the sector.
This includes de-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers are seeing cheaper prices as a result of lower-cost clean energy sources
Under the current system, gas prices often end up dictating the wholesale electricity price, because it is often the last source of supply to meet demand.
Gas prices have spiked this year – peaking at a record £8 per therm following Russia’s invasion of Ukraine – helping to drive up household energy bills to new highs.
This contrasts with all-time low prices for offshore wind of £37.35 per megawatt hour, achieved after the latest Contracts for Difference (CfD) auction that secured a record capacity of almost 11GW of clean energy – almost double the capacity achieved in the previous round, and enough to power around 12m British homes.
The ever-increasing participation of renewables in the system means over time, the Goverment believes cheaper electricity produced by renewables energy will determine the price more often.
This consultation will explore ways of updating this pricing system to further reflect the rise in cheaper renewable electricity – which could have a direct impact on reducing energy costs.
The idea of separating gas and renewable prices was hinted at by departing Prime Minister Boris Johnson in an interview on BBC Radio 4 last month.
The Review of Electricity Market Arrangements (REMA) will seek views on how to address the challenges of higher global energy costs, the need to further boost energy security and to move the UK to a cleaner energy system.
This is increasingly vital amid forecasts that energy demand is set to at least double over the next 13 years.
Some of the other changes being consulted on include introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low, or if it’s particularly sunny and windy, saving households money with cheaper rates
It also includes consultation on reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system.
The consultation forms part of the government’s comprehensive review of the electricity market, first announced in the British Energy Security Strategy (BESS).
BESS significantly raised ambitions for building low carbon and cheaper-to-run technologies such as offshore wind, solar and nuclear to reduce the UK’s reliance on overseas suppliers.
Energy Minister Greg Hands said: “Today’s launch of REMA is a major step in delivering a secure energy future for Britain, putting in place the electricity market design we need to allow us to make the most of our world-leading diversity of power sources while offering more value for money for consumers.”
The price cap is expected to rise to over £3,000 per year this winter, putting increasing pressure on the Government to find ways to ease household energy bills and ensure higher prices are not baked in beyond the current crisis.