Government looking at decoupling electricity and gas prices to bring down bills

Ed Miliband has told Labour MPs he is committed to looking at unhitching electricity prices from gas in a bid to bring down household bills.

The energy secretary told a meeting of the Parliamentary Labour Party (PLP) on Monday night that the move would be “complicated but possible”, according to sources present.

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He is said to be looking at a proposal by eco-tycoon Dale Vince, which argues Labour’s clean energy drive will not bring down bills without reform to the wholesale energy market.

The UK uses a model of marginal cost pricing, where electricity is sold at the price of the most expensive unit of energy needed to meet demand at that point in time.

Gas is often the most expensive energy source, so prices of electricity generated by gas effectively set the wholesale price for all energy generation.

Mr Vince’s report proposes a new bidding system that would break that link, but various other proposals have been put forward by experts as well.

Mr Miliband did not guarantee it could be done but said the government was trying to find a way.

Image: Dale Vince is a Labour donor

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Labour MP for Stroud, Simon Opher, urged ministers to “grasp the chance”, saying it could save households hundreds of pounds a year.

He told Sky News: “The crisis in the Middle East provides us with a real opportunity to radically rethink the way in which our energy market operates.

“Cutting the link between gas prices and electric bills could save consumers hundreds of pounds a year and show that our government is serious about alleviating the cost of living crisis.”

Green Party leader Zack Polanski called for the decoupling of electricity and gas prices in a speech on the economy last week.

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Rachel Reeves was asked about the measure by Green MP Ellie Chowns in the Commons on Tuesday, as she confirmed contingency planning is under way for energy bill support amid the growing fallout from the Iran war.

The chancellor made no commitment, saying Labour’s Planning and Infrastructure Act would “make it easier to build” renewable energy projects. She added that “gas is setting the price of our energy something like a third less than it was just four years ago” due to a reduction of imports.

Sky News has contacted the Department for Energy Security & Net Zero for further information.

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Forecasters have predicted energy bills will hit a three-year high when the current price cap ends at the end of June.

There have been some splits within the Labour Party about how best to protect the UK from future energy shocks – with MP Henry Tufnell calling for an end to the government’s ban on new North Sea oil and gas exploration in an article for The Sun this week.

The Conservatives have also called for more oil and gas drilling in the North Sea, claiming the government is allowing energy security to be “smashed” by the push to reduce emissions to net zero by 2050. On Tuesday they lost an Opposition Day vote aimed at ending the moratorium.

At Monday night’s meeting of the PLP, Mr Tufnell is said to have been a lone voice in his demand, with most of those present “behind Ed”.

Mr Miliband told the meeting that there was “one overriding lesson of the crisis: while we are dependent on fossil fuel markets, we are price takers, not price makers, and we are exposed”.

He also said: “From the moment this war began, we have been determined to go further and faster in driving for clean power. We can only get energy sovereignty and national security with homegrown power we control.”

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Labour’s aim is to make Britain a clean energy superpower by 2030, saying that will cut household bills by £300 a year.

However, Mr Vince’s “Breaking the Link” report says there will still be some degree of gas used under these plans, so high prices would persist even if 95% of electricity came from clean energy, unless market rules are changed.

His report estimates the current link between electricity and gas added £43bn to UK energy bills in 2023 – £367 per household.

He has proposed a system where each generator gets paid the price they actually bid to sell the electricity – not the highest price on the market – which he argues would reflect the truer, cheaper cost of renewables.

‘This won’t be the last energy crisis’

Speaking to Sky News, Mr Vince, a Labour donor, said the Conservatives spent billions suppressing energy bills during the last crisis and we “mustn’t do the same again”.

“We’ve got to solve the cause; that’s the crazy link,” he said.

“This won’t be the last energy crisis of this decade; we will have more. If we sort out the market now, we can insulate ourselves…and make our bills more affordable and stable.”