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Government could decouple wholesale gas and power prices in 'urgent' market reforms

The government is set to launch a consultation over the summer into potential reform. Image: Getty.

The government is set to launch a consultation over the summer into potential reform. Image: Getty.

The government could decouple energy bills from wholesale gas and electricity prices as part of a suite of ‘urgent’ electricity market reforms.

It is set to consult on a number of potential reforms over the summer, including the potential separation of zero marginal cost generation from the wholesale market.

But the government has emphasised that no final decisions have yet been made.

“The high global gas prices and linked high electricity prices that we are currently facing have given added urgency to the need to consider electricity market reform,” a government spokesperson told Current±.

“We are considering a range of market reform options to help bring down the cost of energy and will set these out in our summer consultation.”

The consultation forms part of the Review of the Electricity Market Arrangements (REMA), which was first announced in the British Energy Security Strategy in April.

This will look into a variety of options for a fit-for-purpose market design that ensures the security of supply, investment in low carbon power and value for money for consumers, the Department of Business, Energy and Industrial Strategy (BEIS) noted.

It comes amid continued concern over the cost of living crisis in Britain and soaring energy bills. In April, the price cap jumped 54% to £1,971 driven predominantly by record high gas prices. The default tariff price cap is expected to jump again in October to £2,800.

In response to these increases – which threaten to push more than 6.3 million households into fuel stress – the government has issued a number of support measures and policy documents.

Chancellor Rishi Sunak unveiled three key measures to help support consumers in February, including a one-off repayable £200 loan, a £150 council tax rebate and a discretionary fund.

This was followed in April by the British Energy Security Strategy, which set out support for new nuclear, offshore wind and heat pumps, as well as a new licensing round for north sea oil and gas is planned for the autumn.

In May, a new Energy Bill was announced as part of the Queen's Speech that includes support for a number of key technologies that could improve energy security by further domesticating generation and moving away from a reliance of fossil fuels.

Following this, Sunak announced a windfall tax of 25% on oil and gas companies in the UK. This will cover the cost of further support mechanisms for households and is expected to raise around £5 billion in its first 12 months.

A further windfall tax of generators has been suggested, but trade groups have warned this could risk future investment into energy infrastructure, impacting the transition to net zero and prolonging the UK’s reliance on volatile international gas.

Moving beyond these shorter term measure, the government is now looking to market reform to protect consumers from the volatile international gas market in particular.

BEIS noted that the Contracts for Difference and Capacity Market will both continue to operate in line with current legislation. Additionally, no changes will be made without consultation with industry and stakeholders.

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