Last week, Energy UK released a proposal for a Voluntary CfD scheme, which would be a significant first step toward decoupling gas from retail electricity prices.
This scheme could reduce energy bills by up to £18 billion annually from next year; which would equate to £11 billion off energy bills for non-domestic customers, and a £250 bill reduction per household.
The reality of the energy market is that it doesn’t allow customers to fully benefit from the cheapest form of electricity – domestically produced low-carbon generation. Despite gas only generating around 40% of our electricity, it largely sets power prices. Rapidly increasing international gas prices have led to rapid increases in energy bills. The situation is clearly unsustainable. It causes unintended consequences in the market and doesn’t allow consumers to reap the rewards of cheap, clean generation.
BEIS is looking to address this through a comprehensive long-term programme (The Review of the Electricity Market Arrangements – REMA) which considers more fundamental changes to the market. The reforms envisaged by BEIS in its ongoing REMA consultation could enable an almost complete decoupling of gas from retail electricity prices. The two big questions that arise from a reform of this scale are how quickly this could be achieved, and what this would mean for investment?
It's a delicate balancing act. If the Government moves too quickly, major developers will be forced to rip up the investment case for their new wind or solar array, and start all over again. This is hardly an ideal time to slow down our transition to cheap, clean, and plentiful domestically produced energy. On the other hand, government lethargy will lead to investment hiatus. This was exactly what happened in the last major energy market reform programme (EMR).
At the end of the day, it may be the politics that reigns supreme. Whatever solution the government chooses to help with energy bills over the coming months will be unsustainable to maintain over an extended period if gas prices remain high internationally.
Whilst BEIS considers the longer-term mechanism to remove the link between gas and retail electricity prices, Energy UK has proposed a solution that provides a quick fix for up to 40% of our generation capacity. 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.
This isn’t a panacea for high energy bills. This proposal is designed to work alongside significant government support for consumers. 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. This will avoid more destructive short-term interventions in the market, and allow BEIS to work on a longer-term solution through the REMA process.