Electricity bills targeted in planned shakeup to energy pricing

Households will be better protected from high energy bills triggered by spikes in gas prices, the government said on Tuesday, as it announced a planned shakeup in the way electricity is priced.

Even though renewable energy sources like wind and solar often generate more power, volatile international gas markets can shape what homes and businesses pay for electricity.

The government wants to weaken this link within the next year to shield households from sudden rises in fossil fuel prices, like those triggered by the conflict over Iran.

It has not put a number on the savings but believes they could be "significant".

Analysts say any saving is likely to be small but should make prices more stable.

The Conservatives said that it was essential to make electricity cheaper and blamed high prices on government taxes and levies.

The government also announced an increase to the so-called windfall tax on some electricity generators, which it says will help it to support households with the cost of living.

"We need to get off the fossil fuel rollercoaster – this will make energy bills more stable and take the pressure off family budgets," Sir Keir Starmer said.

Energy Secretary Ed Miliband argued that "you can't solve a fossil fuels crisis by doubling down on fossil fuels", adding that the shift to clean energy was the solution to the threat of climate change and high energy bills.

Even though renewable energy is generating more electricity than ever before, the relatively cheap running costs of wind and solar are not fully reflected in people's bills.

That is partly because the price of electricity on the wholesale market is set, under the current system, by the last unit of electricity needed to meet demand at any given time.

In Britain, that last unit is often gas-generated electricity - which means that when gas prices spike, so do electricity bills.

Many European countries - such as Spain and France - are not as vulnerable to gas price spikes because they are not as reliant on it for electricity.

The government has decided – for now – against revamping the entire system, with gas still playing an important role when the Sun isn't shining and the wind isn't blowing.

But the government wants to shift older, clean energy projects – which account for about one-third of Britain's electricity generation - on to fixed-price contracts.

They would be paid their own renewable energy price - rather than the market electricity price, which is often set by gas - plus any previously agreed subsidy.

This would bring them more in line with recent renewable energy developments, which are already paid a fixed price, and analysts say it would better protect households against fossil fuel price spikes.

The government does not have a firm estimate for savings on bills, but says it is confident it will save people money.

The plans to weaken the link between electricity and gas prices will be subject to consultation, but the government believes the changes could be in place in about a year's time.

The government also says that "excess profits" made by some electricity generators will be taxed at 55% from 1 July, up from 45%.

The so-called windfall tax will also be extended beyond 2028, when it had been due to expire, the government says.

It was introduced in 2023 and applies to some generators with older renewable energy contracts, who would otherwise make large profits when gas prices spike.

The government hopes that the threat of a tax increase will incentivise these generators to make the voluntary switch to fixed-price contracts, which would not be taxed in this way.

Miliband has also announced plans to amend planning laws to make it easier for those without a driveway to charge electric cars and to enable more businesses to install solar panels, as part of a broader drive towards clean electric technologies.

In response, shadow energy secretary Claire Coutinho accused Miliband of "piling on cost after cost onto people's electricity bills", pointing to taxes and levies on bills on top of wholesale prices.

"If we want people to use electricity, then we need to make it cheap," she said.

Reform UK energy spokesperson Richard Tice argued subsidies for some clean energy projects were adding to bills.

"This is a cynical move by Miliband to lock future governments into wasteful, expensive energy contracts," he said.

Liberal Democrat energy spokesperson Pippa Heylings said the government should act and break the link between electricity and gas prices.

"We have consistently argued that if Britain is generating more and more cheap renewable electricity, households should feel the benefit in lower bills," she said.

Green Party energy spokesperson Carla Denyer said she was "relieved" to hear the plans but accused the government of being too slow to act.

"It is nearly two years since the election - two years in which they could have prevented a crisis like this rather than just respond to it," she said.

Plaid Cymru also welcomed the proposed changes but called for the government to go further.

"As long as electricity prices are tied to volatile gas markets, households and businesses will continue to pay the price," its energy spokesperson Llinos Medi said.

The SNP has been contacted for comment.

Northern Ireland is part of a separate energy market.

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