UK energy users could be offered cheap rates when demand is low

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Consumers could be offered cheaper rates to use energy when demand is low or the wind is blowing, under proposals drawn up by the government.

The Department for Business, Energy and Industrial Strategy on Monday launched a 12-week consultation on the “biggest electricity market shake-up in decades” in response to sky-high bills and Britain’s move towards renewable energy sources.

One proposal suggests the introduction of incentives for consumers to draw energy from the grid at cheaper rates when demand is low or if the weather is particularly sunny and windy, saving households money.

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Officials said such a move could send “sharp” signals to encourage consumers to be more flexible in their usage and seek cheaper, greener energy at certain times. The initiative would minimise network costs by bringing electricity demand closer to supply.

If introduced, the policy would build on a scheme being developed by National Grid to tackle prices this winter. It plans to reduce the risk of blackouts by paying consumers to use less electricity at peak times.

The Review of Electricity Market Arrangements (Rema) consultation also proposed a “decoupling” of gas prices from electricity prices to ensure the benefits of cheaper wind and solar power reach consumers.

At the moment, the wholesale price of gas effectively determines how the price of electricity is set regardless of whether the energy is produced via renewables – which are often at a lower, set price.

This mechanism has forced up costs for green energy suppliers since the start of the energy crisis, in which almost 30 suppliers have gone bust, as well as for households.

The price of offshore wind power in the UK has fallen to an all-time low and new contracts should add about 7 gigawatts of clean power capacity to Britain’s turbine fleet by 2026 – enough to power 5m homes.

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More than a quarter of the UK’s electricity comes from renewable sources. However, rising gas prices, exacerbated by the war in Ukraine, have increased prices across the board and deepened the cost of living crisis.

The government also plans to consult with the industry on whether to implement a form of localised pricing in the UK. Such a system could result in large cities such as London being split into zones with different pricing structures, or residents in different regions paying varying rates from each other.

The pricing structure could depend on the availability of nearby local renewable power sources, although the idea is in its early stages. Any such system may have to allay concerns that consumers in some parts of the country could receive much higher energy bills than those elsewhere.

The consultancy firm Cornwall Insight found 63% of energy industry professionals agreed there was a need for drastic reform of the electricity market. However, 61% were against moving the market towards setting wholesale prices on a local basis because of concerns over disruption to existing and planned investments.

The business secretary, Kwasi Kwarteng, said: “We’ve just seen the price of offshore UK wind power fall to an all-time low and gas is a shrinking portion of our electricity generating mix, so we need to explore ways of ensuring the electricity market is adapting to the times.

“That includes ensuring the cost benefits of our increasing supply of cheaper energy trickle down to consumers, but also that our system is fit for the future – especially with electricity demand set to double by 2035.”

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Any changes are unlikely to take place until at least late next year. Ministers are still examining the state of the energy market before this winter amid fears a shortage of gas in Europe could cause high prices or a supply squeeze in the UK.

Separately on Monday, National Grid released its annual Future Energy Scenarios report, which sets out how the UK can reach its target of net zero carbon by 2050. The company said it wants to run a fully decarbonised electricity system by 2035.

It suggested measures including a regional approach to decarbonising residential heating systems; increasing the availability of flexible “time-of-use” tariffs; and improving large-scale geological hydrogen and electricity storage projects.