Electricity: Prices
The question
To ask the Secretary of State for Energy Security and Net Zero, for what reason wholesale electricity prices are set by gas‑fired generation under the marginal pricing system; and what assessment he has made of the impact of this pricing structure on household energy bills.
Answered by Michael Shanks
Our recent announcement on 21 April set out several measures that will help break the link between the price of gas and the price of electricity. These measures include voluntary long term fixed contracts and an updated Electricity Generators Levy.
Marginal pricing is a description of how competitive commodity markets function. It is the foundation of all commodity markets across the OECD. Marginal pricing incentivises the cheapest sources of energy production to provide as much power as possible, more expensive producers are only used when it is necessary to meet demand. The issue is that we are too often relying on gas to provide our power.
Accelerating the deployment of renewable generation, as we are through our Clean Power 2030 Mission, will reduce the amount of time when gas is setting the price and will help to rapidly decouple electricity from gas prices without the need for more complex arrangements. This will in turn reduce the exposure of consumer bills to volatile international prices.
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