Energy UK is backing a plan which could cut bills for households and non-domestic customers by reducing the costs paid to low carbon electricity generators.
The proposals could reduce energy bills by between an estimated £10.8-£18 billion per annum from next year – which would equate to a £150-£250 saving for a typical household, in addition to a £6.7-£11.1 billion cut for non-domestic users. It would allow customers to benefit further from cheap domestic low carbon power – a more detailed briefing on the proposal is available here.
The voluntary scheme – first outlined by the UK Energy Research Centre (UKERC) – would work by offering nuclear plants and renewable generators with existing Renewable Obligation (RO) contracts, who produce around 40% of Great Britain’s electricity, the chance to secure a longer term agreement with lower returns in place of selling electricity at wholesale market prices.
The new contracts would replicate the newer Contracts for Difference (CfD) scheme, which has successfully incentivised renewable energy projects at record-low costs. CfD contracts offer generators a guaranteed ‘strike’ price. If generators sell power onto the wholesale market when above this price, they return the surplus to consumers. With wholesale prices at record levels, generators with CfD contracts are currently doing precisely that, and are predicted to return £23 to the typical domestic customer this winter, according to Ofgem.
Legacy RO contracts (the scheme was closed to new applicants in 2017) pay a subsidy to generators on top of the current wholesale price. This means low carbon generators with RO contracts are benefitting because the wholesale cost of electricity is set by the price of gas, which has been at record levels for the past year.
While the Government is looking to address this issue over the longer term with its recently announced Review of Electricity Market Arrangements (REMA), fundamental reform of the wholesale market will need to be done carefully to avoid any unintended consequences. This plan would be a significant first step to decoupling gas from electricity prices, while giving time for a long-term reform.
This plan could – alongside proposals Energy UK outlined to the Chancellor last month – help customers with energy bills over this winter and beyond.
Adam Berman, Energy UK’s Deputy Director, said:
“The current energy market doesn’t allow customers to fully benefit from the cheapest form of electricity – domestically produced low-carbon generation. This proposal could reduce bills by up to £18 billion per annum, delivering much needed cuts to bills for both households and business customers.
“By giving generators the chance to secure a longer term agreement with lower returns in place of selling electricity at wholesale market prices, this scheme would be a significant first step to decoupling gas from retail electricity prices. Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity.
“Much will depend on the details of the scheme, but with gas prices likely to remain high for some time, we are confident that it can deliver significant savings for customers next year.”