Putting energy-price reform in the “too difficult” box isn’t good enough

There is something rather odd about British electricity pricing.

A wind turbine spinning enthusiastically in the North Sea has not suddenly become more expensive to operate because the international gas price has gone up. Nor has a solar panel developed an unexpected dependence on events in the Middle East.

Yet when gas prices rise, electricity prices in Britain tend to follow.

We are getting another reminder of that now. From October, Ofgem’s price cap for a typical dual-fuel household rose by 4% to £1,723. That is despite the government temporarily removing VAT from electricity. Ofgem says higher wholesale gas prices caused by the continuing conflict in the Middle East are driving the increase.

Understandably, people look at this arrangement and ask a fairly basic question.

Why?

Why gas has such a big say

“Marginal pricing” is the sort of phrase capable of emptying a room faster than a fire alarm.

Fortunately, the principle is reasonably straightforward.

Power generators offer electricity into the market. The system takes enough generation to meet demand, broadly starting with cheaper sources. The final generator required to meet that demand sets the wholesale market price.

In Britain, that final generator has very often been a gas-fired power station.

The consequence is striking. Academic analysis found that in 2021 gas set Britain’s wholesale electricity price 97% of the time, despite supplying only 37% of electricity. In France, where nuclear power dominates the system, gas set the price in just 7% of hours.

That 97% figure is now historical and progress is being made. The government estimates gas currently sets the British price in around 60% of hours as more renewable generation supported by fixed-price contracts enters the system. Under a much cleaner electricity mix, the National Energy System Operator believes that proportion could eventually fall towards 15%.

Good.

But 60% still leaves a country increasingly dependent on electricity heavily exposed to a globally traded fossil fuel.

Some credit where it is due

Government has recognised the problem.

In April, it announced plans to offer older low-carbon generators voluntary long-term fixed-price contracts. Instead of receiving whatever wholesale price happens to prevail, participating generators would accept an agreed price for their electricity. Consumers would therefore be less exposed when gas suddenly becomes expensive.

The government has also increased the Electricity Generator Levy on exceptional returns from qualifying generators from 45% to 55%, while upstream oil and gas production already faces an additional 38% Energy Profits Levy.

These are sensible responses to a real weakness in the system. They should make future shocks less painful and recover some of the extraordinary returns that high prices can create.

They also stop short of fundamentally changing the pricing mechanism.

There is a danger that we settle for the path of least resistance: cushion the shocks, tax some of the windfalls and wait for increasing renewable generation gradually to weaken gas’s influence.

That may be reasonable crisis management. As a long-term answer to one of Britain’s biggest competitiveness problems, it feels incomplete.

The price of waiting

This matters far beyond domestic bills.

Official figures published in June show that average non-domestic electricity prices in Britain were the highest among the UK and 14 comparable EU countries in the second half of 2025. Our gas prices, by contrast, sat around the middle of the pack.

That is quite a peculiar position for an economy trying to electrify itself.

We want factories to switch processes from fossil fuels to electricity. We want people to buy electric cars and install heat pumps. We want to attract data centres and new manufacturing. We want businesses to believe Britain is somewhere worth making long-term investments in energy-intensive industries.

Expensive electricity makes every one of those conversations harder.

The problem is not confined to marginal pricing. Network costs, taxes, levies, infrastructure investment and the pace of new generation all matter. Any serious discussion should acknowledge that.

But gas remains a major driver of the price consumers see. Effectively we’re stuck in a classic Catch-22 situation: electricity needs to become more attractive if we want greater electrification, yet the way costs are currently allocated can leave it disproportionately expensive.

Putting deeper reform into the “too difficult” box simply stores up the problem.

Difficult is an explanation, not an answer

And to be fair, this is difficult.

Electricity markets need to attract enormous investment while keeping the lights on every second of the day. Change one part of the market and you can create consequences somewhere else.

Long-term fixed prices can protect consumers from spikes, but badly designed contracts can also lock them into poor value. Investors need predictability. Consumers need protection. Generators need sufficient returns to build.

Nobody sensible should pretend there is a large red button in Whitehall marked “cheaper electricity” that ministers have inexplicably declined to press.

But complexity creates a greater obligation to explain, rather than a licence to retreat behind it. That is where the current debate remains weak.

• What exactly does “breaking the link” mean?
• Will bills actually fall, or become less volatile?
• How much electricity will be protected from gas prices?
• When will households notice?
• What does success look like in 2027, 2030 or beyond?
• And what happens if voluntary generators decide the government’s fixed-price offer is unattractive?

Those are questions the public and businesses are perfectly capable of understanding.

Explain the bargain

Energy communication too often begins once policy has been decided: announce the measure, produce the graphic, dispatch a minister to a studio and hope everybody appreciates how complicated it all is.

This issue needs something better.

Every major reform should answer a handful of questions in plain English.

What will it do to bills? Give a realistic range, rather than promising vaguely that consumers will benefit.

When will it happen? A saving in five years is different from help this winter.

Is the aim lower prices or greater stability? Both have value, but they are not interchangeable.

Who carries the risk? If government signs long-term contracts, explain what happens when market prices move above or below them.

How will we measure progress? Publish the share of electricity genuinely insulated from gas, alongside changes in bills and industrial prices.

There is no need to pretend the answers are easy.

In fact, saying “this will protect you from the next spike but may not cut tomorrow’s bill very much” could earn more trust than another grand promise to transform energy costs.