The current system
The UK wholesale power market largely operates on marginal pricing.
Generators are dispatched in order of cost, but the market-clearing price is set by the last (most expensive) unit needed to meet demand. This is often a gas plant.
That matters because gas is still the most flexible source that can respond quickly when demand rises or renewable output drops.
Even when wind and solar provide a large share of total generation, gas can still be on the margin and therefore set the price.
For context, gas set the UK wholesale electricity price 98% of the time in 2023.
Why the system was designed this way
Marginal pricing is intended to do two things at once: keep the system secure, and keep dispatch efficient.
- Security of supply and investment signals: the model is designed to ensure there is always enough generation available to meet demand, particularly from flexible plants that can respond when renewables fall away. That same price signal supports ongoing investment in capacity and infrastructure, including lower-cost renewables.
- Efficient dispatch and cost-reflective bidding: it encourages generators to bid close to their cost of production so the cheapest electricity is dispatched first. In practice, this supports competition and helps avoid paying more than necessary for the bulk of electricity when lower-cost generation is available.
A simplified example helps illustrate why prices can still be set by gas even when renewables provide most of the energy:
- Demand at a point in time: 33GW
- Available generation:
- Nuclear: 6GW at £1 (indicative)
- Solar: 12GW at £1.50 (indicative)
- Wind: 10GW at £1.50 (indicative)
- Gas: remaining 3.5GW at £3 (indicative)
Because the system needs that last block of gas to meet demand, gas becomes the marginal unit.
The model is designed so the system always has enough flexible supply, while dispatching the lowest-cost power first.
However, it can also mean electricity prices remain strongly influenced by gas when gas is needed on the margin.
