Breaking the Link: The Macroeconomic Case for Fixing Britain’s Energy Market

Britain’s energy system is still rigged against us. We make cheap green energy here at home, but because of our broken market rules, we all pay the global gas price instead. It’s the great hidden handbrake on our economy: a drag on bills, business costs, investment, growth… everything.

We’ve shown for years that breaking the link between gas and green energy would cut bills overnight. Now we have the macroeconomic evidence too, from Britain’s oldest independent economic research institute, National Institute of Economic and Social Research (NIESR). And the results are staggering.

Their new analysis shows that if we’d broken the link in 2023, Britain would have been in a completely different place. Lower inflation. Lower interest rates. Higher growth. Higher incomes. A stronger economy… and a fairer one.

And if we do it now, even in a calmer energy market, we still get big gains.

What NIESR Found

NIESR modelled two scenarios using their NiGEM global macroeconomic model, the same one used by the Bank of England and the Treasury.

Scenario 1: Breaking the link in 2023 (during the energy crisis)
According to NIESR:

• Electricity prices would have fallen 44%.

• Inflation in 2023 would have been 1.5 percentage points lower, a massive shift.

• Interest rates would have risen much less: around 0.6 pp lower.

• UK GDP would have grown 0.5 pp faster.

• By 2025, GDP would be £36 billion higher.

• Every Brit would be around £273 a year better off.

• Government deficits would fall by around £20 billion by the end of the decade.

This is one policy change, one tweak to the wholesale market, delivering benefits across the whole economy.

Scenario 2: Breaking the link today (normal conditions)
Even without a crisis, NIESR found:

• Inflation would fall by 0.3 pp in year one.

• Interest rates would fall by 0.1 pp.

• Real GDP would be 0.4% higher, permanently.

• Britain would gain £9 billion in extra GDP.

• Households would be around £77 a year better off.

The link to gas keeps us poorer even in a “normal” year.

How Breaking the Link Works

Right now, the price of all electricity in Britain is set by the most expensive generator; usually gas. NIESR confirms what we’ve been saying for years: this marginal pricing system blocks the benefits of cheap renewables. As their report puts it, the current system prevents falling renewable costs from being passed on to consumers.

A pay-as-bid system - where generators are paid what they actually bid - fixes that. Cheaper green energy means cheaper electricity overall. And this cost decline ripples out across the economy through:

• Lower production costs for businesses

• Higher real disposable incomes

• Lower inflation

• Lower interest rates

• Higher investment and growth

NIESR’s diagrams (page 6–7 of the report) show exactly how energy prices cascade through the economy, affecting everything from wages to consumption to exports.

The Bigger Picture: Why This Matters

What this report really shows is simple. Energy is the foundation of the whole economy.
Make energy cheaper and everything else gets easier.

Breaking the link doesn’t just cut bills. It:

• Tackles the cost-of-living crisis

• Makes British business more competitive

• Boosts productivity and investment

• Reduces poverty

• Strengthens public finances

• Helps control inflation without hammering households

It’s one of the quickest, simplest, most effective economic policies we have and the government already has the powers to do it.

So What Are We Waiting For?

Civil servants say it’s “too difficult”. That’s never a good reason not to do something; especially something this important. And especially when it isn’t difficult. We’ve already published a full roadmap showing exactly how to do it inside the current rules.

This new NIESR report takes away the last excuse.

Breaking the link would make Britain measurably better off. More secure. More competitive. Fairer. It’s time we fixed this absurdity in our energy system and unlocked the benefits of the green energy we’re already making.