The gas link that keeps UK electricity bills high

The wholesale price of electricity in the UK is set by the most expensive generator running at any given moment, and that is almost always a gas-fired power plant. This marginal pricing system, known as ‘merit order’, means that even when wind and solar are producing cheap power, your electricity bill still reflects the cost of gas.

As The Guardian reported this week, the link between gas and electricity prices has become a central political question. The UK’s energy regulator Ofgem has acknowledged the problem but insists that changing the system would require a fundamental overhaul of the wholesale market.

The cost to your household

For a typical 3-bed semi using 3,500 kWh of electricity a year, the current price cap of £1,738 means an annual electricity bill of roughly £900. Of that, about 45%, around £400, is directly linked to wholesale gas costs, according to Ofgem’s cost breakdown. The rest covers network charges, levies, and VAT.

That £400 figure is not fixed. When gas prices surged after Russia’s invasion of Ukraine, the wholesale component of electricity bills rose by nearly 70%. Even now, with gas prices at roughly 2.5p per kWh, the UK’s electricity wholesale price hovers around 8p per kWh, more than three times the gas cost. The difference is the gas link: the price of the marginal plant.

What this means for your EPC and upgrades

If you are considering an air-source heat pump or solar panels, the gas link matters more than you might think. Heat pumps run on electricity, so their running cost is tied to the same gas-linked wholesale price. That undermines the typical claim that heat pumps are cheaper to run than gas boilers: at current prices, a heat pump with a COP of 3.0 costs about 2.7p per kWh of heat, compared to a gas boiler at 2.5p per kWh. The margin is thin.

Solar panels, by contrast, offer a hedge. They generate electricity at zero marginal cost, so every kWh you use from your own roof avoids paying the gas-linked wholesale price. For a typical 4 kW system, that can save £200–£300 a year, more if you use a battery to shift consumption to evening peaks when gas plants are often the marginal source.

But the catch is that the current system disincentivises heat pumps for many households. The Energy Saving Trust estimates that a heat pump in a well-insulated home can cut carbon emissions by 60% compared to a gas boiler, but the running cost advantage is only about 10%, and that disappears entirely if the heat pump is poorly sized or the house is draughty.

Reform on the horizon?

The government has floated the idea of a ‘British Electricity Market Reform’ that would split the wholesale market into separate pricing zones for renewables and fossil fuels. This is known as ‘locational marginal pricing’ or, in a simpler form, ‘green power purchase agreements’. Norway already operates a system where renewable generators receive a separate subsidy, effectively decoupling their price from gas.

Yet no official timeline exists for UK reform. The Treasury is reportedly resistant because any change could raise costs for industrial users or require new state subsidies. Ofgem’s own consultation on the matter closed in March 2024, and the response is still pending.

What this misses is the immediate impact on homeowners. While politicians debate, your bills stay high. The most practical step you can take today is to reduce your electricity consumption at peak times, typically 4pm to 7pm, when gas plants are most likely to be the marginal source. A smart tariff like Octopus Agile or a home battery can help shift usage away from those hours.

Who qualifies, and who doesn’t

Households on standard variable tariffs are fully exposed to the gas link. Those on fixed-rate tariffs may have locked in a slightly lower wholesale component, but the underlying mechanism still applies. Off-grid homes using oil or LPG are not directly affected, but their heating costs also correlate with global fossil fuel markets.

If you are planning a heat pump installation, check the Seasonal Coefficient of Performance (SCoP), a machine with a SCoP of 3.5 or higher will beat a gas boiler on running costs even at current prices. The Boiler Upgrade Scheme offers £7,500 off installation, but the grant does not cover the cost of a heat pump that is oversized or poorly installed.

What to do and by when

Households on standard variable tariffs can reduce their exposure by switching to a time-of-use tariff that rewards off-peak consumption. Eligibility opens from 1 October 2024 for most suppliers. If you are considering solar and battery, the current VAT reduction to 0% on installations ends in March 2027, so acting before then saves £500–£1,000. For heat pumps, the Boiler Upgrade Scheme is open until at least 2028, but the grant level may change.