Britons are being overcharged for energy by hundreds of pounds because of a tight supply rule.

UK electricity suppliers have long paid a maximum price agreed by all generators. A groundbreaking new report from a climate think tank claims more than seven billion pounds could have been saved in household bills over the past two years if this scheme had more accurately reflected the lower cost of renewables. Instead of changing the configuration of the market, low-carbon energy producers are now subject to a higher windfall tax than their oil and gas counterparts, the proceeds of which are earmarked for programs of energy assistance.

The non-profit Carbon Tracker Initiative (CTI) says differences in the way electricity prices are determined between generators and wholesalers in the UK mean households have overpaid by up to £7.2 billion between of 2021 and 2022.

The price paid for electricity by supply companies such as Eon, OVO and SSE is determined by the outcome of the tendering process. Generators impose the highest bid on everyone, regardless of how the electricity is generated, with this price then passed on to bills.

If an average price were used instead, the think tank’s calculations suggest around £250 could be saved per household.

Originally, electricity prices were linked to gas generation, as it was the cheapest, but this is no longer the case.

The development of more efficient nuclear power, the exploitation of renewables and rising gas prices mean that gas-fired power stations are now one of the most expensive forms of electricity generation in the UK.

Projections from the Department for Business, Energy and Industrial Strategy (BEIS) put the cost of gas turbines at £85 per megawatt hour (MWh) of electricity produced by 2025.

In comparison, offshore wind is expected to cost £57/MWh, onshore wind £46/MWh and utility scale solar £44/MWh. The latest data available for nuclear puts the price of this energy source at £73/MWh.

Between 1990 and 2021, gas became the main source of electricity generation in the UK, rising from less than 0.1% to 39.8%, according to BEIS. But low-carbon sources have gained ground rapidly in recent years.

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According to the latest Energy Trends Report, the share of renewable sources in the country’s energy mix increased by 18% in the year ending September 2022, with more than four-fifths due to increased wind capacity.

Wind power will reach over a quarter of the UK’s annual electricity demand (26.8%) for the first time in 2022. The UK leads Europe in offshore capacity and is second only to China globally.

The cost of generating electricity through offshore wind will fall by 13% between 2020 and 2021, and by 15% on land, according to the International Renewable Energy Agency (IRENA).

Last year, 15.5% of UK electricity came from nuclear, 5.2% from biomass, 4.4% from solar and 1.8% from hydropower, according to National Grid.

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The current system also allows renewable energy companies to sell electricity at prices higher than their production costs.

In an attempt to remedy the situation, Chancellor Jeremy Hunt imposed a temporary 45% tax on the profits of low-carbon electricity generators in the autumn budget. The oil and gas sector will be subject to a 35% lower rate from January 2023 to March 2028.

Together, the Energy Income Tax and Power Generators Tax are expected to bring in £54billion to the Treasury over six years, which will “help fund energy bill relief for households and businesses. »

The energy price guarantee scheme – which cost the government around £7bn in December alone – is set to rise from £2,500 to £3,000 in April.

A BEIS spokesman said: “We have already launched major changes to the design of the UK electricity market to radically reduce electricity costs for consumers over the long term, including consultation on changes to the wholesale market of electricity that would prevent fluctuating gas prices from setting the price of electricity produced by cheaper renewables.

“To reduce the burden on taxpayers in the short term, we have introduced a temporary electricity generator charge on windfall revenues generated by low-carbon generators, which will help fund the energy relief bill for households and business. »

Gas remains an important commodity in the UK – used not only for power generation but also in heavy industry and for heating around 80% of private homes – but the government’s energy security strategy aims to take a different direction.

Russia has begun to restrict its access to international markets following sanctions for its invasion of Ukraine – the supply shock has sent prices soaring.

CTI’s analysis found that people in countries dependent on gas imports, such as the UK and Italy, continued to pay the highest prices for electricity during the recent period of market volatility. gas price.

But wholesale gas prices rose long before that, by more than 500% between 2005 and 2021. The price of electricity for UK consumers alone rose by 294% during this period.

Energy prices are the cause of the cost of living crisis in 2022, with inflation at 10.5% in 2023.

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