Energy secretary Ed Miliband is "considering" plans to introduce regional pricing for power that would give discounts to homes near infrastructure.
On Thursday, the Daily Telegraph reported the government was "poised" to implement zonal pricing, which would split the country's single national power market into different regions and ultimately raise bills for southern England households.
Miliband dismissed the story as "nonsense," saying he would not approve a plan that led to an energy price "postcode lottery".
But he did confirm that the government was looking to shake-up the energy market, which he said could involve "zonal pricing and reformed national pricing".
Regional pricing is used in some other parts of the world including Australia, Italy and Sweden.
If implemented, it would be the biggest reform of the power market since the 1990s privatisation.
Under the scheme, power costs would match local supply and demand. In practice it could lead to lower bills in areas with abundant wind generation like Scotland than households in the South.
The scheme is supported by some energy businesses - including Greg Jackson, the boss of Octopus Energy, the UK's largest domestic energy supplier.
Mr Jackson said it could make the overall system more efficient and reduce the amount of network upgrades needed to shift the electricity from where it's generated to where it's consumed.
But Dale Vince, the founder of green energy company Ecotricity and a Labour donor, said on BBC Radio 4's Today Programme that zonal pricing was a "terrible idea" as it could "tens of millions of Britons could end up paying more for their energy than they do now".
Speaking ahead of an international energy security summit in London, Miliband said the government were considering options to change energy pricing but insisted "absolutely no decision has been made".
"This is an incredibly complex question that we are looking at about how we reform our energy market," he told BBC Radio 4's Today programme.
"There are two options, zonal pricing and reformed national pricing.
"Whatever route we go down my bottom line is bills have got to fall, and they should fall throughout the country.
"We are going to take our time over this very complex and important decision."
