The problem today  

Even though a lot of the UK’s electricity is now generated cheaply from renewables (over half of total demand last year), the price we all pay for our electricity is still largely set by gas. This is because our electricity system works on a marginal pricing system (48 auctions per day) which means the last power station needed to meet demand (often a gas power station) sets the price for all electricity. So when global gas prices rise, electricity bills jump too – even if most of our power didn’t come from gas. The link between gas and power prices is  weakening but we need more progress in order for billpayers to benefit. [1] 

Breaking the influence of gas 

The government’s latest announcements aren’t going to fix anything overnight, and they aren’t proposing to reform how the electricity market itself works. But what the measures should do is help reduce the influence of gas on the cost of our electricity, primarily by increasing fixed price contracts for electricity.  

At the moment, around one third of UK electricity comes from renewable projects with an older type of contract under the “Renewables Obligation” scheme (RO). Electricity from RO projects is sold on the wholesale market, at prices frequently set by gas power.  

The government plans to move some of these projects on a voluntary basis onto fixed-price contracts known as Wholesale Contracts for Difference (WCFDs). This would lock in stable prices for these projects that don’t rise when gas prices spike, providing certainty for investors and bill payers alike.  

Government also plans to increase the Electricity Generators Levy (windfall tax) from 45% to 55%, using some of the additional revenue to support businesses and households.  

Next steps 

Thrive has been calling for the decoupling of gas from electricity prices for 10 years and so we’re really pleased to see the government now taking steps to make this happen. Breaking the link will help create a fairer system for billpayers by better protecting them from price shocks caused by gas. It also paves the way to accelerate the rollout of renewables, potentially strengthening the investment case for clean energy projects. Clean power sources like wind and solar are the cheapest ways to generate electricity. So the less gas dominates the price, the clearer the advantage of cheaper renewables. 

As part of the latest announcements, the government also confirmed plans to take forward proposals to deliver the pace and scale of network buildout required to support the Clean Power 2030 target. Plus plans to unlock up to 10GW of clean energy capacity by expanding the deployment of renewables across the Public Estate, including hosting wind and solar farms on brownfield land, industrial sites and railway sites.  

Renewables are already playing an important role in helping to protect consumers from fossil fuel price shocks. In March, record wind and solar saved the UK from gas imports worth £1 billion. While we await further details, we hope the government’s latest measures will help billpayers to benefit further from the transition towards renewables.  

 As ever, our focus remains on working with the wider sector to build new clean energy projects that will support the UK’s long-term energy security and benefit communities. 

[1] Q&A: Why does gas set the price of electricity – and is there an alternative? – Carbon Brief