Energy industry backs plan to save businesses and homes up to £29bn a year | Gas

The energy industry has thrown its weight behind a plan it says could save homes and businesses up to £29bn a year, by reducing the prices charged for electricity generated from sources other than gas.

Energy UK, the trade body for the sector, said its proposals could cut between £10.8bn and £18bn a year from household bills, and £6.7bn to £11.1bn for businesses.

This could deliver a saving for households of between £150 and £250 a year.

The business secretary, Kwasi Kwarteng, is understood to have met members of Energy UK to discuss the proposal and is said to be considering it seriously as an option to present to the next prime minister. The Conservative party will announce the result of a vote for its new leader on Monday, with Liz Truss widely expected to win the mandate.

The voluntary scheme would work by separating the cost of electricity from sources such as nuclear, solar and windfarms from the sky-high prices being paid for electricity generated by burning gas in power stations.

Gas prices have more than tripled since Russia began reducing the volumes pumped into Europe in the months before its invasion of Ukraine.

At the moment, the way electricity auctions are designed means the price of all electricity is closely pegged to the price of gas.

Under the proposals – first suggested by the UK Energy Research Centre – nuclear power stations and renewable electricity generators would be encouraged to sign up to a new type of contract. These contracts for difference (CfDs) would mean selling their electricity at a lower price, but one that was fixed and guaranteed over a number of years.

Many older nuclear, solar and wind generators are on renewable obligation (RO) contracts, under which they sell at the current wholesale rate.

The market structure has led to those on RO contracts benefiting from higher prices, potentially making windfall profits. Energy UK is urging ministers to make it possible for RO contracts to be exchanged for CfDs.

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 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.”

The energy industry regulator, Ofgem, is also looking to reform the market in the long term to delink the price of electricity from gas. Several European countries are considering a similar move.

The chancellor, Nadhim Zahawi, said on Thursday the Treasury was examining several options to help consumers this winter. This could also include the Bank of England providing support to energy suppliers for hedging costs, which could allow consumer bills to be reduced.

The energy supplier Ovo has put forward an alternative solution which would involve reducing the price of energy for domestic users, but only for a limited amount of units per household. Energy consumption beyond that level would be charged at a higher price.

Why is the price of electricity pegged to gas?

Typically, electricity prices reflect gas prices. This is because the types of energy needed to produce electricity for the UK are ranked, with renewables and nuclear prioritised ahead of coal and gas. The price of electricity is set every half hour by the margin cost of the last generating unit to be switched off to meet demand, typically gas. This pushes up electricity prices when wholesale gas prices rise.

What is an energy contract for difference?

Under these contracts, electricity plants are paid a flat rate for what they produce over 15 years. That rate is the difference between the “strike price” – an agreed price which reflects the investment in green technology – and the “reference price”, which is a reflection of the wholesale market price for electricity in the UK. If the market price is higher than the strike price, the Low Carbon Contracts Company, which is wholly owned by the government, ensures these savings are passed on to consumer bills. If the market price is lower, the LCCC makes up the shortfall.

The government uses this system, introduced in 2017, to support the development of low-carbon electricity generation projects with high upfront costs and long lifetimes to protect developers from volatile wholesale prices. However, only about 15% of the total fleet of renewable power projects have a CfD; most are remunerated through the older Renewables Obligation Certificate payments.

What are renewables obligation certificates?

Under the renewables obligation model, designed for wind and solar, power generators receive the value of their electricity on the wholesale market, as well as an additional subsidy. Therefore, generators on these contracts have benefited from the soaring gas prices so far this year.