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- Rachel Reeves says support won’t come until the Autumn
- Ed Miliband promises to ‘decouple’ from gas
- No clear way forward for UK market
Chancellor Rachel Reeves has said any energy support for households won’t come until the Autumn as the government searches for ways to bring bills down in the midst of ballooning costs caused by the US-Iran war.
Speaking to the BBC, Reeves also said when support is made available, it will likely only be for “those who need it most”, hinting that it will be based on household income.
She said she was keen to do things differently to the previous government, which in 2022 offered all households a £400 discount in bills regardless of income, as well as introducing the Energy Price Guarantee, which meant bills could go no higher than £2,500.
According to Reeves, this ended up with the most affluent third of households getting “more than a third of the support”, something which “makes no sense at all.”
Bills are set to increase massively in July when the next energy price cap comes in. Nobody knows exactly how much it will go up by, but the latest prediction from Cornwall Insight is that it will increase by 18% to £1,929.
The current Energy Price Cap, which will run from 1 April until 31 June, is £1,641 a year, meaning no energy provider can charge more than that. Since the US-Iran war began at the end of February, gas prices have increased by more than 40% and the government has been scrambling to find a way to make sure household bills don’t become unaffordable.
One way forward is to make UK energy bills less dependent on the wholesale price of gas, which it currently is because we import 60% of the energy we use and because electricity is still generated by gas-powered stations.
Energy secretary Ed Miliband earlier this week is reported to have told Labour MPs that he will cut the link between gas and electricity prices. This would massively cut the price of electricity for households.
To do this he would need to change the UK’s ‘marginal pricing’ model, which at the moment sets the price of electricity to the cost of the most expensive unit of energy used to generate it, which is almost always gas.
According to Sky News, Miliband is looking at other bidding systems that should make electricity cheaper, such as zonal pricing, which divides the market into geographical zones where the price is set based on local supply and demand.
Another idea from clean energy tycoon and owner of Ecotricity Dale Vince is a ‘pay-as-bid’ system which would “pay generators what they actually ask for”. This could be done without overhauling the market, according to a report from Ecotricity last year. That report also said that the link between gas and electricity bills could save the UK £87bn by 2030 and would let renewables compete more fairly.
Eco Experts analysis: What can the government really do to bring down bills?
In the long term, breaking the link between gas and electricity prices is the only way to protect bills from energy crises, such as the one we’re going through now.
If it were that easy, surely the government would just do it? The fact the government hasn’t done it shows just how difficult it is because there is no alternative which doesn’t risk raising costs. Dale Vince’s suggestion sounds simple enough – pay generators what they want and move on.
The problem is that a pay-as-you-bid system can be very efficient because generators still have to guess the marginal price. This makes prices volatile and can put off potential investors.
Zonal pricing, on the other hand, has its own set of problems. It makes renewable energy much cheaper in places where there is lots of it – Scotland, for example, because there will be a lot of wind power – but a lot more expensive in areas where there is high demand for energy, such as the south of England.
The problem with every type of pricing system is that the UK doesn’t have the storage capacity to make the most of its renewable energy potential. A pay-as-you bid system might make bills cheaper in the short term, but it would likely make things more expensive in the years to come. The only way to bring bills down long term is to improve the National Grid, otherwise the government will be stuck in its current cycle of giving financial support every time there is an energy crisis.
A National Grid which has high-voltage transmission lines to carry renewable energy from source to all areas of the country and that gets renewable projects online quicker will be the thing that makes bills come down for good, regardless of government help or what pricing system is used.
