Government unveils measures to weaken link between gas and electricity prices

The UK Government has unveiled measures aimed at weakening the link between global gas market prices and the cost of UK electricity as the Middle East crisis drives up energy bills.

Rachel Reeves will hike the Government’s windfall tax on low-carbon electricity generators form 45% to 55% to raise Treasury funds that will be used to support consumers and businesses with the rising costs in the short term.

The so-called electricity generator levy was introduced in 2022 to target the excess profits being made by nuclear, biomass and renewable energy projects built before 2017 as electricity prices soared after Russia’s invasion of Ukraine.

The Government is also proposing a voluntary move by these “legacy” clean power generators, which supply around a third of Britain’s power, on to fixed-price contracts to help protect consumers from volatile prices.

It is hoped the contracts will deliver benefits on consumers’ bills over the next 12 months, though officials are not yet able to say what savings could be delivered.

And ministers said they will also increase support available for households on heating oil and liquified petroleum gas to transition to lower-carbon alternatives by increasing the boiler upgrade scheme grants to a total of £9,000.

Ed Miliband is set to outline the measures in a speech at the “national growth debate” in Westminster later on Tuesday, where he will vow to “double down not back down” on the shift to clean energy.

The Energy Secretary is expected to answer critics who have pushed for a rethink on net zero and more drilling for oil and gas in the North Sea by warning that ignoring two fossil fuel crises in less than five years “would be completely irresponsible”.

It comes as consumers face high prices at the petrol pumps and looming energy bill rises in the next price cap period from July.

This is because gas plays an outsized role in the cost of electricity in Britain, setting the wholesale price of power around 60% of the time despite supplying a much smaller and decreasing share of power.

Prime Minister Sir Keir Starmer said: “We need to get off the fossil fuel roller coaster – this will make energy bills more stable and take the pressure off family budgets.

“When global gas prices spike, people here shouldn’t be picking up the tab.

“Our focus is simple: easing pressure on household budgets now, while building a homegrown energy system that protects families from global instability in the years ahead.”

The Chancellor said: “Hard-working British families and businesses should not bear the brunt of global gas price shocks while electricity generators are making exceptional profits.”

Ms Reeves said moving legacy generators on to set-price contracts will “help to break the link between high gas prices and high electricity prices – offering households and businesses stronger protection against future energy shocks.”

Other measures the Energy Secretary will set out later on Tuesday to help cut bills include:

– Further details on so-called transitional energy certificates, which will provide industry looking to invest in North Sea drilling with greater clarity over already-explored areas near near existing licensed fields.

– Providing an additional £100 million, on top of the £1.2 billion pledged to deliver energy upgrades to 100,000 social homes, to boost the delivery of solar installations.

– Backing efforts to install solar panels on a further 100 schools and colleges this year.

– Driving forward plans to expand renewables across the Public Estate – including using brownfield land, industrial sites and railway sites to host solar panels and wind turbines.

– Streamlining outdated rules to unblock the electricity grid queue and speed up clean power.

– And plans to make EV chargers, solar panels and heat pumps easier to install for renters, flat-dwellers and households without a driveway.

Mr Miliband said: “As we face the second fossil fuel shock in less than five years, the lesson for our country is clear: The era of fossil fuel security is over, and the era of clean energy security must come of age.

“That’s why we’re doubling down on clean power, to give our country energy security and bring down bills for good.”

The UK has a marginal pricing system, in which the most expensive source of energy brought on to the grid to meet demand sets the price for all generators, apart from those on other types of contract.

That price-setting source is often gas, leaving British consumers at the mercy of volatile wholesale gas prices, while delivering a windfall for generators such as nuclear and older renewables that are not on fixed contracts.

Britain has already moved from gas setting the price of electricity around 90% of the time in the early 2020s to around 60% today as clean power continues to roll out across the country.