The Review of Electricity Market Arrangements (REMA) will seek views on a wide range of options to address the combined challenges of responding to higher global energy costs, the need to further boost energy security and move the UK to a cleaner energy system.

Some of the changes being consulted on include:

• introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or it’s particularly sunny and windy, saving households money with cheaper rates
• reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system
• de-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers are seeing cheaper prices as a result of lower-cost clean energy sources.

Under the current system, gas prices often end up setting the wholesale electricity price, because it is often the last source of supply to meet demand. The ever-increasing participation of renewables in the system means over time, cheaper electricity produced by renewables energy will determine the price more often.

The government said this consultation will explore ways of updating this pricing system to further reflect the rise in cheaper renewable electricity - something that could have a direct impact on reducing energy costs, ensuring consumers reap the full benefits of the UK’s world-leading and abundant supply of cheaper, cleaner energy.

Business and energy secretary Kwasi Kwarteng said: “We’ve just seen the price of offshore UK wind power fall to an all-time low and gas is a shrinking portion of our electricity generating mix, so we need to explore ways of ensuring the electricity market is adapting to the times.

“That includes ensuring the cost benefits of our increasing supply of cheaper energy trickle down to consumers, but also that our system is fit for the future – especially with electricity demand set to double by 2035.

“In what could be the biggest electricity market shake up in decades, I am confident that this review will significantly enhance GB’s energy security and supply for generations to come.”

Today’s consultation launch forms part of the government’s comprehensive review of the electricity market, first announced in the British Energy Security Strategy (BESS). The BESS significantly raised ambitions for building low carbon and cheaper-to-run technologies such as offshore wind, solar and nuclear, as part of UK plans to deliver a clean and secure electricity system by 2035.

The UK is already making huge progress in accelerating the delivery of cheaper, home-grown renewable energy. Earlier this month, the UK secured a record capacity of almost 11GW of clean energy at record low prices, through the government’s flagship renewables scheme - almost double the capacity achieved in the previous round, and enough to power around 12 million British homes.

Andrew MacNish Porter, policy manager at Scottish Renewables, said: “The current electricity market is not fit for purpose. Existing market arrangements are leaving consumers exposed to high gas prices during a cost of living crisis, whilst also failing to incentivise an electricity system that is compatible with achieving net-zero.

“Instead of allowing volatile price of fossil fuels to determine energy bills, consumers should be able to benefit from much cheaper renewables which can produce electricity at a fraction of the cost of gas.

“As we transition to a net-zero energy system powered by renewable energy, market arrangements must also support electricity storage technologies such as pumped storage hydro which will be essential for ensuring flexibility in the system.

“We welcome the REMA and its attempt to rectify these issues and we look forward to continuing to work with BEIS on its proposals.”

A National Grid ESO spokesperson said: “We welcome the breadth and depth of BEIS’ Review of Electricity Market Arrangements. Wholesale markets need reforming to meet net zero and deliver better outcomes for consumers across Britain. REMA is the right forum for stakeholders to align on what is needed.”

An Ofgem spokesperson added: “Protecting consumers is our top priority which is why we are supporting government to do this wide-ranging Review of Electricity Market Arrangements. A fair energy market that protects consumers’ interests will only work if we can make best use of Britain’s cheap, plentiful renewable resources and invest in ways that deliver a low-cost net zero power system using our home-grown energy.

“We now look forward to working closely with government and all participants on this timely review to ensure our energy market arrangements deliver in consumers’ interests and help to make bills better.”