Changing how carbon pricing feeds into Britain’s electricity market could have reduced household and business energy bills by almost £2.3 billion in 2025, according to new research.
The report, from the Energy Competitiveness Unit, proposes a Decarbonisation Rebate that would recover part of the additional revenue received by some legacy low-carbon generators when carbon costs push up wholesale electricity prices.
Gas accounted for 32% of Britain’s domestically generated electricity in 2025 but set the wholesale price 82% of the time, the analysis found. When gas sets the market price, its carbon costs are reflected in the wholesale prices received by other generators.
The proposed scheme would see Elexon calculate the carbon-cost element of the wholesale price when gas is the marginal generator. The resulting uplift received by eligible low-carbon generators would then be recovered through the electricity settlement system and returned to consumers through suppliers.
The report estimates that the scheme could have recovered almost £1.7 billion linked to the UK Emissions Trading Scheme in 2025, rising to nearly £2.3 billion when Carbon Price Support is included.
The proposal would leave the UK ETS and its carbon-price signal intact, while Treasury auction revenues would be unaffected.
If introduced before October 2026, the rebate could save households and businesses between £1.2 billion and £1.5 billion by March 2027, the report estimates.
For 2027, projected savings range from £2.1 billion to £2.7 billion, including £1.3 billion to £1.6 billion for businesses.
The Energy Competitiveness Unit said the reform could help address Britain’s high electricity costs while retaining incentives to decarbonise the power sector.
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