I have been writing for years about the pernicious impact of the way in which UK electricity prices are set, based as they are on a totally flawed economic theory that bears no relationship to reality, and which results in us paying for electricity as if it were all produced from natural gas when much of it is generated in cheaper ways.
This morning, the FT has reported that:
Rachel Reeves has said she wants to cut the link between electricity and gas prices in the UK as the government seeks to reduce its exposure to volatile fossil-fuel costs.
The chancellor said that she and Ed Miliband, the energy secretary, would set out more details within days on ways of ensuring the wholesale price of electricity is set more often by renewables, reviving a thorny issue that has been subject to exhaustive review in recent years.
So it takes Trump to bomb Iran to get an abusive form of state regulation of prices in the UK to be changed? I applaud the potential for change on this issue, but I also have to ask: what chance is there of any further progress when the required stimulus for action in the public interest is as extreme as this?
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Regrettably I am doubtful that Rachel and Ed will carry out a “proper” reform. I suspect that they will just tinker.
Why? They must not upset the “markets”.
Markets. About 3.5x elec is traded vs delivered. Most banks/finance cos have “proprietary trading desks” – prop desks. Pork bellies, wheat, elec – it’s all the same to them.
Elec flows on the x-border elec links (BE, NL, NO, FR) are driven by the prop desks – I know, I’ve been in the x-border control rooms – you can see the trades on a screen.
Volatility in marginal elec markets is a feature (not a failure) of marginal markets. What happens if one has a vastly reduce marginal market? (e.g. only linked to gas), voltality declines massively – I know, I’ve modelled it, using market data. What happens to traders when volatility declines – make less money. So the losers in any reform of elec markets will be … traders, in banks.
Hopefully, this shows why elec market reform is “difficult” – its difficult because traders don’t want it & the finance sector has much more than just a foot into 10 Downing St
Thanks
So, if traders will lose out if we no longer have as much volatility in energy costs, then we can forget reforms. Reeve shows no sign of ever going against the City. She would rather our entire manufacturing and construction base took the hit.
To be more positive, the previous bits was that there was essentially no chance of change in this.
It also has the potential to be a watershed, because if the effects of such a change are positive and/or popular, then it clearly encourages more thinking in the same direction.
You are illustrating entropy in the regulatory system really – the lack of Government energy in dealing with the reality of it and behalf of its voters and letting the markets get their own way. This entropy seems to be everywhere where Labour wants to ‘take the world as it finds it’.
So I couldn’t agree more.
They have obviously known about this before now but have chosen to hide behind a lie to the British public, suggesting that their “hands are tied” and there was nothing that could be done to reduce energy prices for consumers other than to wait until renewable energy capacity is big enough. This lie has allowed other lies from the likes of the Tories and Reform to blame green levies for high energy costs.
Agreed
Local elections every couple of months might help.
This isn’t Reeves caring about electricity consumers. This is Labour staring into a well deserved electoral abyss.
It isn’t their councillors they care about either, it’s that “apres le deluge” of May 10th, the PLP will be looking for a new Labour leader and Chancellor.
A reminder – it takes 80 PLP members to start a leadership challenge, and a challenger similarly needs 80 nominees. It’s a brave armchair pundit who says they know how that will go. The only thing keeping Starmer in office is the aggressive war he is complicit in, perpetrated by his BFFs and war criminals, Great Healer & false Messiah Donald Trump & professed Genghis Khan fan, Binyamin Netanyahu.
“she wants to cut the link between electricity and gas prices”. You can’t.
Generation mix 1: 100% renewables. Price is defined by the levelised cost of each of the renewables multiplied by how much a given renewable is producing in say 15 or 30 mins. If there is no gas in the mix, it has no bearing on price formation.
Generation mix 2: some renewables (50%?) some gas (25%?) some nuke (25%). The price is formed for renewables as above. Nukes in theory fixed price (= levelised cost) gas? use marginal pricing to get the gas price & then put it all together (based on the MWh each system contributes ) to get an average or compound price. Gas contributes to price formation – it does not define it.
Select any generation mix you want but if gas is there, it will ipso factor have some influence (note that word) on price formation. I have a one page formal demolition of marginal pricing (which is based on circular logic – hmm is that an oxymoron?) for those that want it. Words & phrases, their use and abuse are important in elec market reform – marginal fanatics have been abusing words and phrases for 30 odd years. We need more precision. What needs to happen is that elec is priced at the cost of production. This cannot happen @ the moment for the reasons above.
Agreed
But she does not get that
“I have a one page formal demolition of marginal pricing (which is based on circular logic – hmm is that an oxymoron?) for those that want it.”
Could I please get a copy
Thanks
I am asking Mike if I can share it
One reason is that the British public have not realised quite how badly they’re being affected by the broken auction system.
Our electricity prices are around 4x the price per kWh compared to the USA. There are industries that are not really economical here because of energy costs, we’ll struggle with targets of being near the front in AI development, and most importantly, households are having to spend hundreds a year more on energy bills.
Some of these issues need the media to do a better job of illustrating the cost per household of these broken systems.
The penny has finally dropped. Ha ha!
Speaking in Washington, the chancellor said: “So, this is something that I’ve been attracted to for quite some time, delinking electricity and gas prices.”
Really? And it takes a war by the fossil fuel fanatics to tell her the obvious? Pull the other one.
What it shows is how inept and willing government — both Tory and Labour — have been to allow clear price manipulation in Britain for energy which people have been paying for years. Hardly surprising that current debt levels owed to energy companies is now over £5.5 billion, and forecast to rise to £7 billion by the next year. Those figures were expected before the latest war in the Middle East.
Household energy debt has more than doubled over the last three years to reach £5.5 billion.
https://www.independent.co.uk/money/energy-uk-government-ofgem-ukraine-b2927943.html
Perhaps Reeves should also do something about the rip-off standing charge as well — it must be something she knows about. Ofgen has supposedly been talking to the energy companies for at least a year about this, and all they have come up with is having a trial. Dragging their feet again. This will probably take another year before they come up with an answer.
And when private energy companies go bust, their debt goes on the standing charge for the rest of us to pay.
https://pocketwise.co.uk/energy/standing-charge-explained-guide/
Rip-off Britain at its best.
Thanks, and agreed
Thank you MarP. So, it is even worse than I thought.
The fact that the cost of bad management is passed onto citizen customers by the State who set this up is really dastardly thing to do. Where is the incentive to do things properly for goodness sake? There is too much moral risk here. The State should foot the bill for failure. It’s their framework – and use the law to prosecute and claim back funds.
Also, looking back, the private sector was going to set aside profit sums for investment? Like Alan Budd thought it would, but then conceded that all they had done was extract value.
Obviously it was lie, because the money – like water? – seems to have gone to senior managers and investors. And having done that of course, they have to get us to pay for better infrastructure by raising prices, after convincing us that we could avoid paying higher taxes (which was another lie) and saying that competition in the market would keep prices down (yes, yet ANOTHER lie).
I’m proud to say that (1) I never voted for the Tories who brought this in and (2) I have never voted for Governments who perpetuate daylight robbery like this.
Richard if possible can you please give Mike Parr my email address because I would like to read his explanation sheet. Thanks. John
I am asking Mike if I can post it.
A very useful analysis of the energy market including the gas price link here:
https://bylinetimes.com/2026/04/16/the-fossil-fuel-system-is-collapsing-and-taking-civilisations-safety-net-with-it/
Only with by abandoning efficiency and substituting renewables superabundance (which is entirely doable) can we create a fair and sustainable system.
Thanks
Many moons ago, I remember economic text books carried chapters justifying the role of speculators in forming markets that made capital available for start-ups, investment, pension funds etc. I suspect modern texts still do; I no longer read them.
I didn’t swallow it then or now. The markets exist to make money for speculators, including banks. Mike Parr’s analysis seems to confirm this.
A great over-simplification, no doubt, but whichever door you enter by, you can only exit by this one. The door marked ‘energy prices stitch up’
Pretty much agreed