Why Does Gas Still Set Your Electricity Price - And Could That Change?

On a breezy afternoon in Britain, wind turbines might be generating 40% of the country's electricity at a cost of essentially nothing - fuel-free, zero emissions, running on weather. And yet, at that same moment, households are paying for electricity as though it came from a gas-fired power station, at whatever gas costs that day on international markets.

It is not a scam or an accounting error. It is how the electricity market is deliberately designed. The Middle East conflict has made the consequences of that design impossible to ignore again - just as Russia's invasion of Ukraine did in 2022. And this time, the question of whether Britain should keep that design - or fundamentally change it - has reached the top of government. Energy Secretary Ed Miliband has told Labour MPs he is actively exploring decoupling electricity prices from gas.

This article unpacks exactly how the current system works, what effect renewables are already having on it, and what the various reform proposals would actually do - including some honest caveats that often get lost in the political debate.

The merit order - how electricity is priced

Electricity is bought and sold in wholesale markets in half-hourly slots. Every generator that wants to sell power submits a bid - the minimum price at which they are willing to generate. These bids are ranked from cheapest to most expensive, and the system operator (NESO) accepts them in order until enough supply exists to meet demand. This ranking is called the merit order stack.

The critical feature is this: every generator dispatched in a given half-hour receives the same price - the price of the last (most expensive) generator needed to balance supply and demand. That is called the marginal price, or the clearing price.

Here is the approximate SRMC stack for different generation types in Britain today:

This is why a windy, sunny afternoon in Britain still prices electricity at the cost of gas. Wind might be generating 40% of demand at near-zero cost, but if any gas plant is needed to make up the remaining supply, it sets the price for every megawatt-hour traded that period - including the wind farm's output.

This is not a glitch. The uniform clearing price is an efficiency mechanism: by paying all generators the marginal price, the market ensures the cheapest units are always dispatched first. The problem is what happens to the difference - the gap between what wind costs to run and what it gets paid. That is called the inframarginal rent, and it flows to low-cost generators as windfall profit. Under normal gas prices, it is an accepted feature of the design. When gas prices spike by 50% because of a geopolitical crisis, it becomes politically explosive.

The renewable energy paradox - you're funding it, but you can't benefit from it

Here is the sharpest way to state the problem with the current system. Over the past decade, British households and businesses have collectively paid tens of billions of pounds in levies on their electricity bills to fund the construction of offshore wind farms, solar parks, and other low-carbon generation. These costs appear on your bill as "policy charges" - currently around £170 per year for a typical household.

That investment has been largely successful. Britain now has some of the largest offshore wind capacity in the world. On many days, wind alone generates more than half the country's electricity. The fuel cost of that electricity is zero.

And yet under the current market design, households pay for electricity as though none of that wind exists.

This is not an accident of design. Uniform clearing prices are a deliberate feature: they ensure every generator recovers sufficient revenue to justify investment, without the grid having to negotiate individual prices with hundreds of operators every half-hour. The problem is that a system designed in the 1990s - when gas was the dominant and cheapest source of power - now produces increasingly absurd outcomes as renewable capacity scales up.

Consider what happens on a windy Sunday afternoon in February. Demand is low, offshore wind is running flat out, and gas barely needs to be dispatched. The clearing price might be £40-50/MWh - low by recent standards, reflecting cheap gas backup. Wind farms earn £40-50/MWh on fuel that cost them nothing. Households pay £40-50/MWh and perceive no benefit whatsoever from the fact that most of their electricity came from zero-fuel-cost sources.

Now consider what happens when a Middle East conflict causes gas prices to double. That same clearing price mechanism transmits the full shock instantly - even on days when gas is generating a small fraction of total supply. Every megawatt-hour of wind-generated electricity is re-priced upward in lockstep with gas. Wind farms earn windfall profits. Consumers pay as though gas generated everything.

It is worth being precise about what has happened, to be fair to the system. Renewable expansion has reduced UK wholesale prices compared to what they would otherwise have been - analysis suggests by around a third in 2025 versus a counterfactual all-fossil system. The public has benefited, just not in a way that is visible or proportionate to the scale of investment made. The question is whether a reformed market design could make that benefit direct, transparent, and insulated from gas price shocks.

What renewables are already doing - an effect most commentary misses

Here is an important nuance that most "decouple now" commentary glosses over: renewables are already reducing the influence of gas on electricity prices, even within the current market design. They just do it gradually, and less dramatically than advocates suggest.

As more wind and solar capacity is added, gas plants are progressively pushed higher up the merit order - and eventually knocked out of it entirely in the periods when renewables are generating most abundantly. Even when gas still sets the marginal price, it is increasingly a cheaper, more efficient gas unit than it was, because the pricier, less efficient plants have been squeezed out by cheaper competition below them.

Analysis by the Energy and Climate Intelligence Unit (ECIU) suggests that renewable expansion had already reduced UK wholesale electricity prices by around a third in 2025 compared to what they would have been under an equivalent all-fossil system. And analysis from LCP Delta indicates that if the UK reaches its clean power 2030 targets, the electricity system would be almost entirely insulated from gas price shocks - not because of market redesign, but because gas simply would not be needed often enough to set the price.

The Spain case study - what near-decoupling looks like in practice

Spain offers the clearest real-world example of what happens when renewable penetration reaches the point where gas rarely sets the price. The data is striking.

In Spain, gas plants were clearing - appearing in the dispatch stack - in roughly two-thirds of half-hour periods as recently as 2023. By 2025 that figure had collapsed to under 14%, driven by the rapid expansion of solar and hydro. As one industry analyst put it, gas participation in the Spanish wholesale market has dropped dramatically in just two years as solar and hydro push it out of the merit order, meaning gas sets the price far less often.

Spain also benefits from hydro - dispatchable, zero-SRMC, able to respond to gaps in solar output. The UK has far less hydro capacity and relies much more heavily on offshore wind, which is less predictable on daily timescales. But the principle is the same: more zero-SRMC generation capacity reduces the frequency with which gas is the marginal unit. The UK is on the same trajectory - just behind.

Reform options - a taxonomy of what's actually being proposed

The policy debate contains several distinct mechanisms that are often conflated. It is worth separating them clearly, because they have very different implications for investment, affordability, and delivery timelines.

There are important cross-cutting issues that apply to almost all the structural reform proposals. First, investment signals: the uniform clearing price and competitive wholesale market have underpinned the large capital inflows into UK renewables. Changing the market design mid-programme introduces uncertainty that increases the risk premium developers apply, potentially raising the cost of capital for new wind and solar projects. The government is acutely aware of this - it is a primary reason REMA was so cautious.

Second, the balancing mechanism: gas CCGTs accounted for roughly 77% of turn-up costs in 2025's balancing mechanism - around £850 million out of a £1.1 billion total. Operators have sometimes charged over £5,000/MWh for short-notice dispatch. Moving gas off the main wholesale market does not eliminate this - it potentially makes it more expensive to manage, because the commercial incentive to maintain plant availability weakens.

What REMA decided - and what it left open

The government's Review of Electricity Market Arrangements (REMA), launched in 2022 and concluded in July 2025, was the most comprehensive review of British electricity market design in decades. Its conclusion was deliberately cautious.

The government decided to retain a single national GB-wide wholesale electricity market - explicitly ruling out both zonal pricing and the more radical structural separations. The rationale centred on investment certainty: the seven-year implementation timeline for zonal pricing, and the risk that regional price disparities would deter development in Scotland and north-east England where the best wind resources sit.

What REMA instead committed to is a package of "Reformed National Pricing" measures focused on better locational signals within the existing market structure:

• A Strategic Spatial Energy Plan (SSEP) - due in late 2026 - mapping optimal locations for new generation and storage across Britain, to reduce the grid constraint costs that arise when wind generates in Scotland but demand is in London.
• Reform of Transmission Network Use of System (TNUoS) charges - aimed at making network cost signals more stable and better reflecting where investment is genuinely needed.
• Code modification P462 - would remove government subsidies from bid prices in the Balancing Mechanism, making dispatch costs more transparent and reducing distortion.
• Expanded Contracts for Difference (CfD) for new low-carbon dispatchable technologies.

What decoupling wouldn't do - the honest version

A lot of the political rhetoric around decoupling implies that breaking the gas-electricity link would mean bills fall dramatically and stay low. It is worth being precise about what the evidence actually supports.

Switching to pay-as-bid or splitting markets would not reduce the underlying cost of gas. The UK imports significant volumes of LNG and trades gas on international markets. Whatever system is used to price electricity, the cost of procuring gas to run gas power stations is set by global supply and demand - not by domestic market design choices. Reform does not make gas cheaper; it changes who captures the difference between gas costs and the clearing price.

Inframarginal rent is harder to eliminate than it appears. If non-gas generators know they are in a protected pool and will not be undercut by cheaper gas dispatch, the rational move is to bid higher. Several economists and analysts have raised this concern about both pay-as-bid and split market proposals - the rent gets recreated through higher bids rather than higher clearing prices.

The balancing mechanism cost likely rises. As mentioned above, gas peakers and CCGTs play a critical role in grid stability that the wholesale market currently incentivises through the clearing price. Move them off the market and that incentive has to be replaced - either through regulated contracts (at potentially higher cost) or through an expanded capacity market.

What this means for consumers making decisions right now

While the policy debate plays out - and it will take years to resolve - the practical question for households is what to do about their energy costs in the interim.

The price cap for Q2 2026 falls by 7% to £1,641 for a typical annual dual fuel bill - largely because of reductions in policy costs, not because wholesale prices have eased materially. Forecasters are watching whether conditions in the Middle East escalate or resolve, and the Q3 outlook is genuinely uncertain.

The fixed tariff market has responded to that uncertainty in a way that matters for switching decisions. Most competitive one-year fixed deals have been withdrawn as suppliers price in the risk of sustained elevated wholesale costs - the fixed deals that remain are currently priced around £2,000 annually for typical consumption, well above the Q2 cap level.

The bottom line

The mechanics of marginal pricing are not going away tomorrow. The government's REMA process ruled out the most radical structural changes and opted for incremental reform within the existing national market design. Ed Miliband's current exploration of decoupling reflects genuine political pressure - but the policy options are genuinely complex, the trade-offs are real, and history suggests these processes take longer than the crisis that triggered them.

The most durable route to electricity prices that genuinely reflect the cost of clean generation is still building more of it, faster, with the grid infrastructure to deliver it where it is needed. Spain did not decouple through market design - it did it by building solar at a scale that pushed gas to the margins.

Market reform can help. A gas strategic reserve, better-designed CfD contracts, or reformed balancing arrangements could reduce windfall rents and limit exposure to future gas shocks. But the honest expectation is meaningful improvement over a period of years - not a sharp bill cut next quarter.

In the meantime, the most powerful thing households can do is understand how their bill is actually constructed, compare what the market is offering against the cap, and switch when the numbers make sense. That is what SwitchPilot is here for.