You've probably noticed that your electricity bill feels high. You may have heard that Britain has some of the most expensive electricity in Europe. Both of those things are true — and the reason comes down to a quirk in the way electricity markets are designed that most people have never heard of. It's called marginal pricing, and once you understand it, the way energy is priced in the UK will never seem quite the same again.
UK electricity prices were higher than in all but one EU state — Germany — in the first half of 2025. Gas prices in the UK were 28% below the EU average, while electricity prices were 23% above it. The ratio of electricity to gas unit prices in the UK was higher than in any EU country. House of Commons Library
Let that sink in. Under the current Ofgem price cap, the average price of electricity is 27.69p per kWh, while gas costs just 5.93p per kWh Ofgem — meaning electricity costs nearly five times more per unit than gas, despite the fact that much of our electricity is now generated from wind and solar, which cost almost nothing to run once built.
For businesses, the picture is even starker. UK industrial electricity prices are 125% above the EU-14 median, at 25.33p/kWh compared to the EU median of 11.25p/kWh. Very large industrial users in the UK pay more than five times more than Finland, where large industrial users pay just 4.37p/kWh. Substack
So why is this happening? The answer has very little to do with the cost of generating electricity — and everything to do with the rules that govern how the price is set.
Every half hour, the National Grid needs to balance supply and demand across the country. To do this, it calls on power stations in a specific order — cheapest first, most expensive last. This ranked list is called the merit order.
Wind and solar plants tend to have the lowest operating costs, followed by nuclear power plants, while natural gas-fired plants typically have the highest operating costs. Sqe So the grid calls on renewables and nuclear first, and only switches on gas plants when it needs to top up supply.
So far, so sensible. Here is where it gets strange.
Here is the rule that drives Britain's high electricity costs. All of the power plants running in each half-hour period are paid the same price — set by the final generator that has to switch on to meet demand. That final, most expensive generator is known as the "marginal" unit. Carbon Brief
In the UK, that marginal unit is almost always a gas-fired power station.
This means that a wind farm generating electricity for almost nothing, a nuclear plant whose fuel costs are tiny, and a gas plant paying expensive market rates for fuel are all paid the exact same price per unit — the price the gas plant needs to cover its costs.
While renewables are prioritised upfront as the cheapest electricity sources, their intermittent nature means gas-fired power plants often get switched on to fill gaps when demand exceeds supply. As expensive imported gas is often the marginal source, electricity prices get intertwined with fluctuating gas markets — so even though renewable electricity is cheaper to produce, these cost savings are not passed on to consumers.
The result is what we see today: wind turbines and solar panels generating cheap, clean electricity across the country — while consumers pay a price set by the cost of burning gas.
Imagine a supermarket sells three kinds of apples. Locally grown ones cost 10p each to produce. Imported ones from nearby Europe cost 30p. Imported ones from the other side of the world cost 80p.
Now imagine that whenever the supermarket runs out of local and European apples and has to bring in the expensive ones to meet demand, it reprices all the apples on the shelf — including the cheap local ones — at 80p.
That is exactly what happens in the British electricity market, every half hour, every day.
Marginal pricing is far from unique to the UK's electricity market. It is used in most electricity markets in Europe and around the world, as well as being widely used in commodity markets generally. Carbon Brief
The logic, when it was designed, was sound. If you pay every generator only what it bid, cheaper generators like renewables would simply bid higher to match whatever the clearing price turned out to be — so you'd end up in the same place. The marginal system at least ensures the cheapest plants are always called on first, and that enough expensive backup generation is economically viable to keep the lights on.
As one energy economist put it, marginal pricing is the "worst approach to clearing markets apart from all the others." Carbon Brief
The problem is that the system was designed in the early 1990s, when almost all electricity came from large thermal power stations burning coal or gas. Then, the low operating costs of nuclear plants put them at the top of the merit order, followed by coal and then natural gas. At periods of high demand, the most expensive capacity — gas-fired peaking plants — could be quickly ramped up to balance the market. Sqe In that world, the marginal price was a reasonable reflection of system costs. Today, with wind and solar generating over a third of British electricity at near-zero cost, the same rules produce a very different outcome.
The UK's current electricity mix means that gas is almost always the marginal fuel, even though it only accounts for around a third of generation overall. In contrast, the marginal fuel in many other European countries is hydro. In France, it tends to be nuclear, while in Germany it is split between coal, gas and hydro. Carbon Brief
This is why the Ukraine crisis hit British consumers so hard. When Russian gas was cut off and global gas prices spiked, the marginal price of electricity rocketed — even on days when the wind was blowing and solar was generating abundantly. Every unit of electricity, from every source, was repriced upward by the cost of gas.
Energy prices have fallen back from the highs reached during the energy crisis, but even with the 7% fall in the April 2026 cap, they are still 35% above pre-crisis levels. House of Commons Library The same dynamic is now playing out again with the Iran conflict, which has pushed gas prices up around 50% in recent weeks.
It does — but only gradually, and at the margins. Analysis suggests that renewables have already reduced UK wholesale electricity prices by a third in 2025. As more renewable generation is added to the system, the most expensive gas plants in the merit order are knocked out of the market. Even though another gas plant may still be setting the price, it will be a cheaper and more efficient unit. Carbon Brief
There is also a mechanism called Contracts for Difference (CfDs) that partially addresses the problem. CfD projects are paid a fixed price for the electricity they generate, regardless of the price on the day-ahead wholesale market. As such, they dilute the impact of gas on consumer bills. In 2022, only 7% of UK generation was covered by CfDs. As of 2026, this has climbed to 13%, and by 2030 CfD projects will make up as much as half of total electricity supplies in the UK. Carbon Brief
So the system is slowly improving. But in the meantime, the link between gas prices and electricity bills remains intact — and highly visible every time there is a geopolitical crisis.
There is a second, related issue that makes Britain's electricity market particularly inefficient. Even green electricity is priced according to gas costs, and because the grid cannot always move power from where it is generated to where it is needed, the UK pays wind farms to turn off and gas plants to replace them. That wasted wind cost nearly £1.5 billion last year alone.
Wind farms in Scotland generate vast amounts of cheap electricity that the grid cannot always transmit south to where it is needed. So National Grid pays those wind farms a "constraint payment" to switch off — and then pays a gas plant in England to generate instead. The consumer pays for both.
There is no incentive to shift demand from peak, expensive, and most polluting periods to less pricey ones, making electricity more expensive for everyone. The British electricity system has few market instruments to let price signals function properly — demand response, dynamic tariffs and local balancing remain the exception rather than the rule.
The UK government has been reviewing electricity market arrangements for several years, and the debate is live. In March 2026, a Labour MP questioned the marginal pricing system in parliament, asking: "Because renewables are cheaper, should we not look to benefit from that, rather than having a system that allows gas to set the price, even if it accounts for only 1% of our energy?" Carbon Brief
Several alternatives have been proposed. "Pay as bid" — where each generator is paid only what it bid, rather than the clearing price — sounds appealing, but the European Commission concluded this would not provide cheaper prices, because bidders would simply guess the clearing price and bid accordingly. Carbon Brief
More promising are proposals for zonal pricing, CfD expansion, and the kind of retail-integrated smart tariffs that companies like Octopus Energy and now Tesla are beginning to offer — where consumers are rewarded for shifting demand away from peak gas-generation periods.
The priority is not to scrap net zero but to modernise the market architecture. Smart meters, dynamic tariffs, and local price signals should allow households and firms to adjust consumption in real time. Without that, the energy transition remains expensive, inefficient, and politically fragile.
Understanding the marginal pricing problem explains a lot about your electricity bill — and it points toward the best strategies for reducing it.
If gas is always the price-setter, then the best hedge is to reduce the amount of grid electricity you consume. Generating your own electricity from solar panels removes you from the marginal pricing system entirely for those units. Storing it in a battery means you can also avoid buying from the grid during peak gas-fired generation periods.
According to analysts, electricity prices in the UK are projected to remain high until the late 2030s. Now is certainly a good time to explore ways to reduce your reliance on the grid.
The marginal pricing problem is structural — it will take years of market reform and renewable expansion to fully resolve. But the tools to insulate yourself from it are available today.
At PowerBase.Energy, helping you understand the system — and navigate around it — is exactly what we do. Whether that's through solar, battery storage, smart tariffs, or just clearer information, we're here to help you take control of your energy costs.
Interested in reducing your exposure to wholesale electricity prices? Talk to the PowerBase.Energy team about battery storage options for your home.