The government could save energy users £5bn a year by overhauling the electricity market to stop gas-fired power stations from setting the wholesale price for electricity, according to the former energy tsar.
Britain relies on gas plants for about a quarter of its annual electricity use, but they play a much greater role during spells of low wind and low solar generation.
Removal of gas plants from the market could lead to a drop in household electricity bills by up to £1.7bn a year by 2028, according to a research report. Energy costs for businesses and industrial users could fall by £3.3bn a year, it says.
The report co-authored by Adam Bell, the government’s former head of strategy at the Department for Energy Security and Net Zero, argues that the UK’s gas plants should be held in strategic reserve, available to be fired up when needed without distorting the overall cost of electricity in the wholesale market.
Bell, policy director at the consultancy Stonehaven, said: “Taking gas out of the power market is a radical step, but these are radical times. The government has very few options to cut bills, and none with as high a return as our proposal.”
The report has emerged amid growing concern over the price of electricity in the UK, which has some of the highest energy costs among developed economies.
Energy prices have stoked the cost of living crisis by raising consumer prices across the economy, and could also derail the government’s plan to encourage people to use electric vehicles and heating alternatives.
Even though the UK is sourcing a growing proportion of its electricity from low-cost renewable energy projects, the price of generating power from gas continues to keep overall costs high.
This is because inBritain’s electricity market, the price is dictated by the most expensive source of power generation available, which is typically its gas-fired power plants.
Under this “marginal pricing” system, the UK’s electricity market price is set by gas 98% of the time, according to academic research published in 2023. This is the highest rate across Europe and well above the EU average of just under 40% of the time.
Under the plans put forward by the report, which was commissioned by Greenpeace, operating a gas plant would be regulated so its owners would require a licence to be able to recover the cost of running the plants from bill payers at a level agreed by the industry regulator.
This could be an attractive option for power plant owners, according to the report, because it would provide revenue certainty as the UK radically reduces its demand for fossil fuel electricity in the 2030s.
It would also prevent the cost of gas power from influencing the overall electricity market price, and put an end to the multimillion pound payouts handed to gas plant owners to keep the lights on when supplies are tight.
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Angharad Hopkinson, a political campaigner at Greenpeace UK, said: “It’s absurd that we still allow expensive and volatile gas to set the price we pay for electricity.
“Renewable energy, like wind and solar, is cheaper than gas, its prices are far more stable, and we’re producing more and more of it every year in the UK.
“But because the energy system is rigged in favour of the gas industry – keeping prices and their profits high – our bills have soared and we’re not reaping all of the benefits clean power brings.
“The government has a huge opportunity to take control of our energy by removing gas-fired power stations from the market and bringing them into a strategic reserve. This would stop the unfair profiteering of gas giants and start saving households and businesses vital money on their energy bills.”
A government spokesperson said: “Our mission for clean power by 2030 will replace our dependency on unstable fossil fuel markets with clean, homegrown power controlled in Britain, which is the best way to protect billpayers and boost our energy security.”