Why Gas Often Sets the Price of Electricity: Marginal Pricing Explained
- Wholesale prices are set by the marginal source: the most expensive generation needed at that moment.
- Gas is often the last source called on, so it often sets the price.
- Wind has been Britain's main source of generation since 2023, according to Ofgem.
- Ofgem says wholesale costs are around 40% of a household energy bill.
- Batteries can reduce how often gas sets the price by storing cheap power for peak hours.
In Britain the wholesale electricity price is set by the most expensive source needed to meet demand, and that is often gas. It is one reason cheap wind does not always mean cheap electricity.
How marginal pricing works
Imagine every power station lined up from cheapest to dearest. The grid uses the cheapest first and adds more expensive ones until demand is met. The price for that period is set by the last, most expensive source that was needed. This is the marginal price.
Ofgem explains this in its article on what drives wholesale electricity prices in Britain. Prices change from day to day with supply, including how windy it is, and with demand.
Why gas so often sets the price
Gas generation is frequently the last and most expensive source in the queue, so it often sets the price. Ofgem says that, for now, wholesale gas prices set the wholesale electricity price for a large majority of the time, because not enough renewables have been built to avoid using gas.
That is true even though wind has been Britain's main source of generation since 2023, according to the same article. Renewables are typically cheaper to produce than gas, but when demand is high and the wind is low, the system still needs gas to fill the gap, and the gas plant sets the price for everyone.
What could change
Ofgem cites NESO modelling that suggests gas could set the price only about 30% of the time by 2030. That is a modelled estimate, not a promise, and it depends on how quickly new renewables and storage are built.
The same article says interconnectors let Britain import and export around 10% of its electricity, and that battery storage could also reduce how often gas sets the price. Batteries do this by charging when power is plentiful and discharging at the peak, so less gas is needed in those hours.
What this means for a household battery
A home battery is a very small player in this market, but it follows the same logic. It buys when the price is low, often because wind is strong or demand is weak, and avoids buying when gas is setting a high price. That only pays if your tariff reflects the wholesale price in some way. Fixed flat tariffs hide the swings. Smart tariffs show them. Read how to earn money with a home battery on a dynamic tariff for the practical side.
Also remember that a household bill is more than wholesale. Ofgem puts wholesale at around 40% of a bill, so even a large wholesale fall does not translate one for one. The rest covers networks, policy schemes and supplier costs.
Common questions
Why does gas set the electricity price when we have so much wind?
The price is set by the last source needed. When wind is not enough, gas fills the gap and sets the price for that period.
Will gas stop setting the price?
Ofgem cites NESO modelling suggesting gas could set the price about 30% of the time by 2030. That is an estimate, not a certainty.
Do batteries help lower prices?
Ofgem says battery storage could reduce how often gas sets the price, by storing cheap power for when demand is high.
How much of my bill is wholesale cost?
Ofgem says around 40% of a household energy bill.
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