Recommendation 24

The wholesale price of electricity is set by the cost of the type of power that most recently met the peak demand for energy. This means the wholesale price is often determined by the cost of gas even at times when renewables or other sources are generating large parts of the energy supply.58 The Department told us that, as the UK invests in more renewables and nuclear, more power will be generated by technologies with high construction costs relative to low running costs, in contrast to gas-fired power. We asked about the Department’s plans to reform the market in response to these changing dynamics, including how it will uncouple the cost of electricity and the price of gas to enable consumers to benefit from greater proportions of the generating mix coming from low-cost renewables. The Department told us there was a question about how market arrangements should evolve as the UK moves to a “renewables-centric” system so that there is an operable system in place where customers pay the proper cost of production. It was looking at the appropriate market arrangements for electricity and intended to publish a consultation shortly. We also asked the Department how it intended to manage and maintain investment in the energy market whilst potentially changing the way the market operates. The Department told us that consulting with industry and investors was a critical part of developing its revised electricity market arrangements.59