Why UK electricity prices are linked to gas – and what it means for your bills
The UK government has started to change how electricity prices are set. This is because electricity in Britain is among the most expensive in the world. Many people are asking why prices are so high and why they are closely linked to gas.
In recent years, the world has faced another major energy crisis. This has raised serious questions about the UK’s energy system. One key question is: why does the UK still have such high electricity prices compared to other countries?
Even though the UK is producing more renewable energy like wind and solar, electricity prices have still increased a lot. In fact, wholesale electricity prices have more than doubled since the war in Iran disrupted global gas supplies, especially shipments from the Gulf region. This disruption pushed global gas prices higher.
Because the UK depends heavily on gas, these higher global prices have affected the entire energy system. Gas is used not only for heating homes but also for generating electricity. So when gas prices go up, electricity prices usually follow.
To deal with this problem, the UK Treasury has introduced new measures to reduce the link between gas and electricity prices. The goal is to make electricity costs more stable and less dependent on gas markets. But to understand how this works, it is important to look at why gas and electricity are so closely connected in the first place.
How much does the UK depend on gas?
The UK depends a lot on gas. Around one-third of all energy used in the country comes from gas. This includes heating and electricity.
About 23 million homes in the UK use gas boilers. This means roughly 85% of households rely on gas to heat their homes and water. At the same time, gas power plants produce nearly 30% of the country’s electricity.
Even though renewable energy sources like wind and solar are growing quickly, gas is still used every day. It plays a key role in keeping the electricity system running, especially when renewable sources are not producing enough power.
Most of the UK’s gas—around 80%—comes from pipelines in the North Sea. This includes gas from UK fields and from Norway. The rest comes from liquefied natural gas (LNG) shipped by tankers from countries like the United States, as well as gas taken from storage.
Interestingly, only a small amount of the UK’s gas comes from the Gulf region. For example, Qatar supplied just 1% of the UK’s gas last year.
However, even with different sources of gas, prices are still affected by global markets. This is because the market price is set by the most expensive source of gas. When global prices rise, the UK has to pay more, even if some of its gas comes from cheaper sources.
Why don’t renewables make electricity cheaper?
Many people think that increasing renewable energy should make electricity cheaper. But this is not always the case in the UK.
The reason is how electricity prices are set. In the UK, the price of electricity is based on the most expensive source of power needed at any given time. This system is called “marginal pricing.”
In simple terms, even if cheaper renewable energy is used first, gas power plants are often needed to meet demand. When this happens, the cost of gas sets the price for all electricity.
A simple way to understand this is to imagine a football penalty shootout. A team chooses its best players first. But in the end, the result depends on the player who takes the final shot. In the same way, renewable energy is used first, but gas often decides the final price.
In 2023, gas set the electricity price in the UK about 98% of the time. This is much higher than in other European countries. For example, France relies heavily on nuclear power, which reduces its need for gas. Spain uses a large amount of renewable energy, which also helps keep prices lower.
The UK is investing heavily in renewable energy, and this is helping. However, experts say it may take until the end of the decade before renewables have a strong impact on overall electricity prices.
What is the government doing?
The UK government is trying to reduce the influence of gas on electricity prices. One of its main plans is to change how older renewable energy projects are paid.
Many older renewable projects currently receive subsidies through a system called the Renewables Obligation (RO). This means they earn money based on market prices, plus extra support payments.
The government wants these projects to switch to fixed-price contracts. This is similar to how newer renewable projects are paid. Under fixed contracts, electricity prices are agreed in advance, which can provide more stability.
This change could affect about 35 gigawatts of energy capacity, which is around 30% of the UK’s total electricity supply. If many projects move to fixed contracts, it could reduce the impact of gas prices on electricity.
The government believes that over time, as more renewable projects use fixed contracts, the role of gas in setting prices will decrease. However, this process could take many years.
To encourage companies to switch, the government plans to increase taxes on profits made by electricity generators. From July, the windfall tax will rise from 45% to 55%. The extra money is expected to help households struggling with high energy bills.
Some experts suggest more radical changes. For example, gas power plants could be removed from the main electricity market and kept as a backup supply. They would only be used in emergencies and at fixed prices. This could further reduce the influence of gas on electricity costs.
What does this mean for household bills?
Despite these plans, energy bills are still expected to rise in the short term. Forecasts suggest that the typical annual household bill could reach about £1,836.
The government’s new measures are unlikely to reduce bills immediately. This is because changes to the energy system take time to implement.
Also, the government has not clearly explained how it will use the extra tax money to support households and businesses. This creates uncertainty about how much help people will receive.
Switching renewable projects to fixed contracts could help stabilise prices in the future. But the government must be careful. If contracts are agreed when market prices are high, it could lock in higher costs for a long time.
What can households do?
In the meantime, the government is encouraging people to use more low-carbon energy. This includes installing electric vehicle chargers and solar panels.
One planned change is to make it easier for households to install charging cables outside their homes. This will allow people without private parking to charge electric cars more easily, without needing special permission.
The government also wants to promote small “plug-in” solar systems. These are easier to install and could help households generate their own electricity, reducing their bills.
Conclusion
The link between gas and electricity prices in the UK is a major reason why energy bills are so high. Even as renewable energy grows, gas still plays a key role in setting prices.
The government is taking steps to reduce this link, mainly by promoting fixed-price contracts for renewable energy and increasing taxes on energy companies. However, these changes will take time to have a real impact.
For now, households are likely to continue facing high energy costs. But in the long term, a shift towards renewable energy and less reliance on gas could lead to more stable and possibly lower electricity prices.
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