Energy bills update: Millions of households could save £200 a year under new electricity proposal

A new analysis from think tank Common Wealth suggests British households could see their annual electricity costs fall by as much as £200 if the Government overhauls how wholesale power is priced.

The report argues that the current market structure remains anchored to an era when fossil fuels dominated generation, despite renewables and nuclear now contributing a far greater proportion of the nation's electricity supply.

Common Wealth contends that reforming this outdated pricing mechanism would shield consumers from international gas market volatility while better reflecting the true cost of the cleaner energy sources increasingly powering British homes and businesses.

Gas-fired power stations now generate roughly a quarter of the country's electricity, yet these plants continue to determine the marginal price for the entire market nearly 80 per cent of the time.

This pricing anomaly means that even when households consume power from cheaper wind farms, solar installations or nuclear reactors, they still pay rates influenced by more expensive gas generation.

The consequence, according to Common Wealth, is that British consumers remain vulnerable to sudden swings in global gas prices despite the substantial growth in low-carbon generation capacity.

To address this structural flaw, Common Wealth proposes transforming the National Energy System Operator into a centralised purchaser of all electricity generation.

Under this model, NESO would acquire power directly and shift existing low-carbon generators onto Power Purchase Agreements aligned with their original investment terms.

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Gas-fired stations would be relegated to a strategic reserve, dispatched centrally at cost rather than permitted to set broader market rates.

The think tank argues this approach would prevent gas operators from expanding their profit margins as their plants run less frequently but become increasingly critical for grid stability.

Donal Brown, a senior researcher in energy policy and political economy at the University of Oxford, said: "Britain’s electricity market was designed for a fossil fuel age and it’s now a key barrier to a lower cost, low-carbon future.

“Gas still sets the price for 80 per cent to 90% per cent of the time, while generating only a quarter of our power. This funnels billions in windfall profits to private generators, while UK homes and businesses pay some of the highest bills in the world."

NESO would also gain authority over demand-side flexibility, enabling coordinated procurement that helps consumers and battery storage shift usage away from peak periods.

Commonwealth calculates the reform package would deliver annual savings of between £10billion and £16billion by the end of the decade.

For individual households, this translates to reductions of approximately £125 to £200 per year, bringing the government closer to its commitment to slash energy bills by £300.

The think tank projects cumulative savings of £58.6billion between 2026 and 2030 under its central assumptions, rising to £105 billion should prolonged disruption to fossil fuel supplies push prices higher.