- Households could save an average of £185 a year on energy bills under the proposed reforms.
- A thinktank says gas still determines electricity prices most of the time despite generating only a quarter of Britain's power.
- The proposals come as rising gas prices linked to the Iran conflict push energy bills higher.
Households across England, Scotland and Wales could save almost £200 a year on their energy bills if the government took on a much bigger role in the electricity market, according to a new report that argues Britain's current pricing system is no longer fit for an energy sector increasingly powered by renewables.
The report, published by thinktank Common Wealth, proposes a major shake-up of the UK's electricity market that would see a publicly accountable body become the sole purchaser of electricity before selling it on to suppliers. Supporters of the idea say it could help break the long-standing link between electricity prices and volatile gas markets, a connection that has left households exposed to repeated energy price shocks.
The proposal arrives at a sensitive moment for consumers. Energy bills are set to rise again in July after turmoil in global oil and gas markets linked to the Iran conflict pushed wholesale gas prices higher, adding fresh pressure on household finances.
One of the central arguments in the report is that Britain's electricity market continues to operate according to rules designed for an era dominated by fossil fuels.
At present, the wholesale price of electricity is largely determined by the cost of gas-fired generation, even though gas now accounts for only around a quarter of Britain's electricity production. According to the report, gas generators still set electricity prices between 80 per cent and 90 per cent of the time.
That means cheaper electricity generated by wind farms, hydroelectric plants and nuclear stations is often sold at prices linked to far more expensive gas generation.
"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," Donal Brown, senior researcher in energy policy and political economy at the University of Oxford, reportedly said in the report.
Brown argued that the current system channels billions of pounds in additional profits towards some generators while leaving British households and businesses facing some of the highest electricity costs in the developed world.
A return to a more centralised model
Under the proposed system, the government would effectively purchase electricity from all generators through a series of contracts rather than allowing wholesale prices to be driven by gas markets.
Gas-fired power stations would operate as a strategic reserve, stepping in when renewable output is low or when nuclear plants are unavailable. Existing nuclear facilities, older wind farms and hydroelectric plants would receive payments through long-term public power purchase agreements.
Rather than linking prices to gas, payments would reflect the average cost of Britain's overall electricity generation mix.
Brown reportedly said the approach would "break the link" between gas and electricity prices while reducing inefficiencies within the system.
The model would move Britain closer to electricity market structures already used in parts of Europe and elsewhere around the world. It would also resemble some aspects of the UK's electricity system before privatisation in the 1980s.
According to the report, the savings could be substantial. If wholesale electricity prices remain around £100 per megawatt-hour because of persistently high gas costs, total savings over five years could reach £74 billion. Even if wholesale prices fall to £70 per megawatt-hour as energy markets stabilise, the report estimates savings of around £41 billion.
Based on those scenarios, average household savings could come to roughly £185 a year.
Pressure growing for bigger reforms
The findings land as ministers face growing calls to reduce the influence of gas on electricity prices following successive energy shocks over recent years.
The government has already signalled support for reducing Britain's dependence on fossil fuel markets through greater investment in renewable energy. Prime Minister Keir Starmer has previously argued that the UK needs to move away from what he described as the "fossil fuel rollercoaster", reportedly saying this would help make bills more stable and ease pressure on family budgets.
Energy secretary Ed Miliband has also linked recent price volatility to Britain's continued exposure to international gas markets, reportedly saying that the era of fossil fuel security is over and that clean energy security must take its place.
The Treasury is meanwhile planning to increase the windfall tax on excess profits made by electricity generators in Great Britain from 45 per cent to 55 per cent. Revenue raised from the measure is expected to support households struggling with energy costs.
Critics, however, argue that tax changes alone will not fundamentally address the way electricity prices are set.
The Department for Energy Security and Net Zero did not comment directly on Common Wealth's proposals. A government spokesperson reportedly said that the long-term solution to lower bills lies in expanding homegrown clean energy and reducing Britain's exposure to global fossil fuel price shocks.
Whether ministers are willing to embrace the more radical reforms suggested by the report remains uncertain. But with energy bills rising once again, the debate over who sets Britain's electricity prices — and how they are set — is unlikely to fade anytime soon.
