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Energy bills: UK working on plan to limit impact of gas shortages

·Finance Reporter, Yahoo Finance UK
·4 min read
Britain's Business Secretary Kwasi Kwarteng speaks at the annual Conservative Party Conference, in Manchester, Britain, October 4, 2021. REUTERS/Toby Melville
Business Secretary Kwasi Kwarteng is looking to reform the way that energy is priced. Reuters/Toby Melville

The UK business secretary has revealed that the government is working on a plan to prevent surging international gas prices from feeding into consumers’ electricity bills as energy prices soar.

Currently in the electricity market, gas-powered generation sets the price that everyone pays regardless of whether a household uses gas or not.

Surging gas prices have prompted ministers to look at reforming so-called "marginal pricing", where the most expensive megawatt needed to meet demand sets the power price for all generation.

In this wholesale market, energy customers end up paying more because the price is set by the most expensive form of energy, which is currently gas, even if they only use electricity.

"It cannot be the case forever that we can link directly our electricity prices to gas prices when gas is only a portion of the electricity generating mix," Kwasi Kwarteng told the Business, Energy and Industrial Strategy (BEIS) select committee.

Read more: Energy scams jump 10% as fraudsters exploit cost of living crisis

He said it was well-suited 40 years ago but called for change as more of the UK's energy comes from renewable sources like wind.

"All our constituents are paying a price for electricity which is directly related to the marginal cost of gas production. It doesn't reflect the actual cost of generation."

In recent years, wholesale electricity prices in the EU have largely been driven by gas prices. As the cost of gas is rising internationally, this helps to explain why electricity bills are also going up.

Annual electricity and gas bills are already expected to hit £2,800 a year from October as the price cap is raised.

The government has thus far rejected calls for outright ban on natural gas boilers but has said it is aiming to phase out new installations from 2035 “to cheaper, more efficient alternatives”.

Under the government’s current plans, there's a gas and oil boiler ban in newbuild homes only from 2025.

To help UK households move away from gas, the UK Government announced a Boiler Upgrade Scheme (BUS), providing grants to encourage property owners to install low carbon heating systems in their homes.

Through the BUS, people can get £6,000 off the cost and installation of a ground source heat pump, £5,000 for an air source heat pump, and £5,000 for a biomass boiler. However, the later only applies to rural areas and properties that are off the gas grid.

The aim of the scheme largely works to reduce the UK’s carbon footprint, as well as lessen its dependence on gas, which continues to be a volatile market.

The Business Secretary also addressed reports that millions of households could face power cuts this winter in a worst-case scenario if Russia cuts off more gas supplies to the EU.

Kwarteng said Hinkley Point B nuclear power station, which is due to shut down in August, could stay open longer in order to allay fears of potential blackouts, but it that need not be a lengthy extension.

“We have being doing a lot on winter resilience and that report on blackouts was looking at extreme possibilities,” he said.

“Any government has to consider extreme possibilities but I’m not expecting anything to that extent.”

Kwarteng also could not say if the £1bn-a-year costs of propping up Bulb Energy, which failed in November, will be met by a private buyer for the firm, the Treasury or UK households.

Read more: UK energy price cap expected to rise to £2,800 in October, says Ofgem boss

“We're getting ahead of ourselves because we don't know what the actual deal will be.”

Pressed on whether UK households would have to share the costs, he added: “I’m not prepared to comment either way on that”.

Raising bills to cover the costs of collapsed Bulb Energy would increase energy bills even higher than the £2,800 a year estimate from October as the price cap is raised.

Permanent secretary Sarah Munby told MPs: “The default expectation has always been in the past that it would go on consumers’ bills at a timing to be selected, as a matter of policy at the time.

But the cabinet member said that was not his view. “My understanding is slightly different. I don't think there's any assumption that the costs will be absorbed [by customers].

“It's a completely different set of circumstances.”

Support for Bulb had been worth £600 for each of the collapsed firm’s 1.6 million customers.

Watch: Why are gas prices rising