Stopping gas dictating UK energy price could cut bills by £200, thinktank says

Iran war has increased gas price, with effects on UK energy bills that could be avoided, Common Wealth says

Household energy bills could be reduced by up to £203 a year by stopping expensive fossil gas setting the price of energy in the UK, according to a report.

Under the existing system, gas – the most expensive form of electricity production in the UK system – set the price of energy 85% of the time in 2024 in the UK, even though it generates only about a quarter of Britain’s electricity.

This means that, as the cost of gas rises further amid the US and Israeli war on Iran, consumers may face huge increases on their household bills this year.

However, a report from the Common Wealth thinktank released on Thursday sets out how the government can cut the link between gas prices and electricity bills, saving consumers hundreds of pounds a year and stopping renewable energy companies, which are being paid the price of expensive gas, from reaping unearned windfalls.

Mathew Lawrence, the director of Common Wealth, said: “We know the solution. Stop gas setting the price of electricity and prevent renewable operators reaping a windfall. This crisis is a test of the government’s mettle. If they respond with ambition, they can lay the foundations for a more affordable and secure energy system, not just for today, but for the future.”

There is growing pressure on the government to reform the UK’s energy market. On Wednesday, the Green party leader, Zack Polanski, backed the idea of decoupling expensive gas from the electricity market and called for bold action to protect bill payers. The idea has also been supported by independent energy experts, consumer groups and climate organisations such as Greenpeace.

The Resolution Foundation has called for the UK government to launch a “social tariff” to provide cheaper energy for poor households.

Common Wealth’s report sets out how the government can decouple gas through a “single buyer model”. This would take low-carbon generators such as legacy renewables and nuclear out of the wholesale market, instead paying them fair, fixed prices. Gas plants would be moved from the market to a “strategic reserve” – which would be drawn on when renewables and nuclear were not able to meet the demand. If gas was required it would be bought from this reserve at a price that minimised excess profits during periods of scarcity. Common Wealth said changing the energy market like this could be done within the next 12 months – in time to help address the current energy crisis.

Donal Brown, an expert in energy policy at the University of Sussex, said the UK’s electricity market left consumers “dangerously exposed to volatile gas prices”.

“This report sets out a simple emergency reform: decouple electricity prices from gas by having the system operator purchase power at fair and fixed prices,” he said. “By preventing windfall profits and stabilising prices, this approach could save billions and protect households from the next energy price crisis.”