As energy prices and the attention surrounding them continues to grow, the market still operates on a marginal pricing model, where the most expensive generator, typically gas, sets the wholesale price for all power. For many this is explained by the UK’s reliance on gas, the price of which was sent soaring following the Ukrainian invasion and has risen again during the ongoing conflict surrounding the US, Israel and Iran.
The spotlight has also been on energy prices compared to other European countries, where prices are significantly lower. At its core, this raises a fundamental issue. Should prices continue to be set by marginal cost in a system increasingly dominated by low marginal cost generation, or should the market evolve to better reflect the underlying economics of the energy mix?
Energy Secretary Ed Miliband recently told Labour MPs that he wants to explore ways to decouple electricity prices from gas, acknowledging that while such a change would be complex, it is within reach. Among the ideas being considered are proposals backed by Dale Vince, who has warned that simply building more clean energy won’t be enough to bring bills down without reforming the market itself.
There are clear challenges as gas will continue to play a critical role in balancing the system and maintaining security of supply, and those services still need to be properly valued. However, the current model exposes consumers to volatility that is increasingly difficult to justify considering the broader generation stack. If this direction is pursued, it would represent one of the most significant structural changes to the UK electricity market since de-regulation, with implications for pricing, investment signals and how risk is allocated across the system.