Britains energy costs could be slashed by severing link between gas and electricity prices

Britain’s energy bills could be reduced by at least £2 billion annually through reforms to prevent costly gas-fired power plants from setting wholesale electricity prices. According to Adam Bell, a former head of energy strategy at the Department for Business, removing gas plants from the electricity market entirely could create significant savings for consumers.

Currently, the UK’s wholesale electricity market operates on a marginal pricing system, which means the most expensive generator required to meet demand determines the price for all generators. Gas plants, while responsible for only around 30 per cent of Britain’s electricity output, set the price 98 per cent of the time. This practice has been particularly damaging since the sharp increase in global gas prices following Russia’s invasion of Ukraine in 2022.

Bell, now a director of policy at the consultancy Stonehaven, argues that decoupling gas and electricity prices would be the government’s most significant measure to cut costs in the near term. While efforts to review electricity market arrangements have been discussed, progress on this front has been sidelined in favour of other proposals, such as regional pricing.

An alternative plan suggested by Stonehaven includes creating an out-of-market mechanism to establish a gas strategic reserve. Gas plants would receive regulated asset base returns to operate on demand, under the control of the National Energy System Operator. This strategy, viewed as less contentious than direct nationalisation of gas plants, could guarantee stable returns for operators while reducing overall costs from unpredictable market fluctuations.

By implementing such reforms, Bell estimates an annual saving of £2 billion could be achieved, translating into approximately £23 in savings per household. Households are currently responsible for about one-third of energy costs, highlighting the significant impact of spiralling gas prices on consumer bills.

The government’s plans to achieve clean power generation by 2030 depend on retaining gas plants for backup power, even though their share of electricity production may fall to less than 5 per cent. Creating a strategic reserve framework could align with this vision by phasing gas plants out of the wholesale electricity market while ensuring they remain available to meet periods of high demand.

While unions and campaign groups have suggested full nationalisation of gas plants, legal challenges and fiscal limitations make this option highly complex. The government has stated that progress towards energy independence through renewable power is its primary focus, but solutions such as strategic reserves offer viable short-term pathways to lower consumer bills.