Chancellor Rachel Reeves and Energy Secretary Ed Miliband are working on a plan to “delink” electricity prices from gas, with further details expected within weeks. The move reflects growing concern that the current pricing system no longer reflects how electricity is generated, particularly as renewable energy becomes more prominent.
A Pricing System Tied to Gas despite Changing Energy Mix
Under the UK’s marginal cost pricing model, gas typically sets the wholesale price of electricity, even when a significant share of power comes from cheaper renewable sources. According to reports, this means households often pay more for electricity when global gas prices rise, regardless of the actual cost of production.
Rachel Reeves highlighted this issue while speaking in Washington, noting that “when gas prices are high, we end up paying more for our electricity, even though the cost of producing it doesn’t change”. This disconnect has become more visible as wind and solar contribute a larger share of the energy mix.
The Department for Energy Security and Net Zero has indicated that renewables have already reduced the frequency with which gas sets electricity prices by about a third since the early 2020s. Still, gas remains the dominant price-setting factor in most cases.
Ed Miliband has previously described the UK’s reliance on gas-linked pricing as part of a “fossil fuel rollercoaster”, reinforcing the government’s broader aim to stabilise energy costs. According to The Guardian, ministers see reforming this pricing structure as a way to better align costs with the country’s evolving energy system.
Reform Efforts Alongside Energy Security and Market Pressures
The proposed changes come amid heightened volatility in global energy markets, partly driven by geopolitical tensions. Recent conflict involving Iran has contributed to rising oil and gas prices, which in turn affect electricity costs under the current system.
Industry figures acknowledge that any shift away from gas-linked pricing will take time. Dhara Vyas, chief executive of Energy UK, said that decoupling would likely happen gradually as renewable capacity increases, adding that the influence of gas on pricing should decrease over time.
At the same time, the government continues to support domestic oil and gas production through measures such as North Sea “tiebacks”. Reeves explained that these involve using existing infrastructure to develop additional resources, describing them as “the quickest way to bring on stream more oil and gas”.
Environmental groups have also weighed in on the proposed reforms. Greenpeace has argued that removing gas from its central role in price-setting could save billions annually and allow consumers to benefit more directly from cheaper renewable energy. According to the organisation, the current system leaves electricity prices overly exposed to fluctuations in fossil fuel markets.
Further details of the government’s plan are expected soon, as ministers work through the technical aspects with industry stakeholders. The outcome could mark a notable shift in how electricity prices are determined in the UK, with direct implications for household energy bills.
