The Government is preparing to break the link between electricity and gas prices in a major market overhaul flagged by Chancellor Rachel Reeves, during IMF meetings in Washington.
The move would dismantle the UK’s marginal pricing model, where gas fired power stations set the wholesale electricity price, meaning consumers pay more even when cheaper renewable power dominates generation.
Ministers argue the system no longer reflects how the grid operates as low carbon sources take a larger share of supply.
Investors reacted sharply with shares in SSE falling 5.2% while Centrica dropped 4.9% -making them among the biggest fallers on the FTSE 100 despite a broadly positive session for European markets.
The sell off reflects concerns that utilities which have benefited from higher wholesale prices linked to gas, could see margins squeezed if pricing is reformed.
Decoupling could reduce revenue predictability and reshape how power assets are valued, particularly for companies with exposure to gas generation or flexible supply.
Reeves confirmed she is working with Energy Secretary Ed Miliband on a “practical way” to separate the two markets signalling one of the most significant interventions in electricity pricing in decades.
“It is quite a big change but is absolutely the right thing to do especially as electricity makes up an increasing part of our energy mix.
“At the moment when gas prices are high we end up paying more for our electricity even though the cost of producing it doesn’t change.”
Rachel Reeves
The policy aims to address a long running distortion.
Under marginal pricing the most expensive generator needed to meet demand sets the price for all electricity, which has tied power costs to volatile gas markets, even as renewables with near zero marginal cost have expanded rapidly.
Analysts said the comments rattled confidence in the current market structure, which is why share prices have wobbled.
The scale of the change remains unclear. Officials have yet to outline how a new pricing system would work or how it would balance investor confidence with lower consumer costs – but Reeves indicated further detail could emerge within weeks.
The reform sits at the heart of a wider shift in energy policy.
As electricity demand grows driven by electrification of transport and heating the Government is under pressure to ensure prices reflect the true cost of generation, rather than being anchored to fossil fuel volatility.
The UK looks like it is moving towards a new pricing model that could finally separate power costs from gas- but in doing so it is opening a new phase of uncertainty for investors and the wider energy market.
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