Households in England, Scotland. Wales could save nearly £200 a year on their energy bills if the government stepped into the market to act as the sole buyer of electricity, according to a thinktank.
The research found that public procurement of electricity. meaning the government would become the “single buyer” of power before it is resold to consumers, could shave billions of pounds from electricity prices.
Currently, power prices to consumers are set by the cost of gas, which can be highly volatile. Average energy bills are to rise by more than £200 in July because of the impacts of the Iran war. which has driven up gas prices.
Although the UK’s increasing use of cheaper renewable energy should bring prices down. the current structure of the market allows gas generators to set the wholesale price for all so consumers do not feel the benefits.
In a report for thinktank Common Wealth, Donal Brown, a senior researcher in energy policy. political economy at the University of Oxford, said: “Britain’s electricity market was designed for a fossil fuel age and it’s now a key barrier to a lower cost, low-carbon future.”
“Gas still sets the price for 80% to 90% of the time, while generating only a quarter of our power. This funnels billions in windfall profits to private generators, while UK homes. businesses pay some of the highest bills in the world,” Brown said.
The government is under growing pressure to tackle the cost of electricity after the war in Iran caused a global surge in oil. gas markets, creating the second energy price shock in four years.
But experts have warned that proposals set out earlier this year to de-link gas. electricity prices would lead to only modest savings for consumers, unless a more radical approach is taken to reforming the market.
Under the thinktank’s plan to limit the impact of expensive gas generation, the government would effectively buy all the power generated in England, Scotland. Wales through contracts offered by a publicly accountable body to generators.
Gas-fired generators would join a “strategic gas reserve”. whereby generators would be paid to step in when renewables were producing less or nuclear reactors were offline, according to the research.
Meanwhile, the UK’s legacy nuclear power plants, older windfarms that benefit from generous past subsidies,. existing hydroelectric plants would be paid through “public power purchase agreements”. The report suggests the price offered through these contracts would be set through the average of the overall generation mix. rather than pegged to the price of gas.
“Our proposals would break the link [between gas. electricity prices], contracting directly with generators at cost-effective prices and eliminating wasteful practices such as paying for energy twice when the grid is constrained,” said Brown.
This centralised model is similar to one used in other markets around the world. would be closer to the way the nationalised power market worked before privatisation in the 1980s. Such an approach would in effect prevent gas companies from making higher profits when gas is in short supply.
Over a five-year period, assuming gas prices remained high. kept electricity prices at £100 a megawatt-hour (MWh), the reforms could result in savings of up to £74bn in total, according to Brown.
The research found that if the Iran war can be speedily resolved. the energy shock subsides, with wholesale power prices falling to £70/MWh, the savings would be about £41bn in total. On average, if electricity prices come in somewhere between those estimates, then households could save about £185 a year.
Brown believes further savings would come from encouraging people to use electricity at cheaper times. by investing in battery storage to balance out the intermittency of renewable generation.
The government expects the gas market’s influence to wane in the decades ahead as new renewable energy projects are rolled out under competitive fixed-price contracts,. more generous legacy deals come to an end.
The chancellor. Rachel Reeves, plans to increase the windfall tax on excess profits made by electricity generators in Great Britain from 45% to 55%, with the proceeds going to support households struggling with their bills. But critics say the measure stops short of the radical change needed to have a significant impact on overall costs.
The Department for Energy Security and Net Zero would not comment directly on the proposals. “The only way to bring down energy bills for good is with the government’s clean energy mission, which will get the UK off the rollercoaster of fossil fuel prices. on to homegrown power that we control,” a spokesperson said.
Additional reporting by Jillian Ambrose
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