Source · Select Committees · Public Accounts Committee
Recommendation 26
26
Deferred
Marginal electricity pricing links high gas prices to consumer bills, incurring huge public costs.
Conclusion
The approach to pricing electricity in the UK – known as marginal pricing - means that high wholesale gas prices results in high energy bills for consumers. This is because all electricity generators in the market are paid a fixed price per unit of electricity, which is determined by the most expensive bid needed to meet demand, which currently is often provided by gas plants. Therefore, wholesale electricity prices will be exposed to gas prices even as the proportion of gas generation decreases as renewable electricity generation increases. The energy bills support that government introduced to help both domestic 59 Qq 144, 195 60 Ofgem, Retail market indicators - Breakdown of the default tariff price cap (GBP £, direct debit), 1 October 2022 61 Q 102 62 Qq 15–16 63 HM Treasury, Spring Budget 2023, HC 1183, March 2023 64 Q 143; C&AG’s Report, para 3.22 65 Q119 66 Q 17 20 Energy bills support and non-domestic consumers with their bills in light of the unprecedented high prices in wholesale gas prices that the government estimated, at the end of December 2022 would cost the public purse £69 billion over the schemes’ life.67
Government Response Summary
The government agrees with the conclusion and states it aims to publish a second Review of Electricity Market Arrangements (REMA) consultation in Autumn 2023. The REMA programme will consider various options to protect consumers from future price spikes and ensure they benefit from lower cost renewables.
Government Response
Deferred
HM Government
Deferred
6.1 The government agrees with the Committee’s recommendation. Target implementation date: Autumn 2023 6.2 The department aims to publish a second review of electricity market arrangements (REMA) consultation in Autumn 2023 and will take decisions on shorter-term reforms more quickly where it is viable to do so throughout the REMA programme. REMA’s overall timescale will depend on the extent of reform found to be necessary and could range from those that could be taken relatively quickly, to reforms that could take a number of years to implement – depending on the nature and complexity of reform. The aim for the second consultation is to set out a direction of travel, next steps and support a smooth transition to any new arrangements over time. 6.3 The REMA programme will consider a range of potential options to shield consumers from the impacts of potential future commodity price spikes and to ensure they benefit from lower cost renewables, including more transformative options, as well as whether an evolution of the current approach represents the best balance of consumer protection, investor confidence and overall system efficiency.