Cost of Living UK: Why is the wholesale price for electricity set by the price for gas?

Video explains how the UK's wholesale market for electricity works and why the wholesale price is often defined by the price of generating electricity using gas,

[kimileuca]

Thank you. The free market section went like a light bulb in my head. This explains energy company massive profits for the last two years despite cost of living crisis.

[sailaway]

For a snap shot of supply mix UK energy dashboard site is available, on average it sits around 30% gas 20% imports 15% wind 10% solar 10% nuclear 5% other each source adjusting depending on time of day, weather

[MegaDeano]

Renewable prices are pre agreed, aren't they ? They aren't cheap . About £70 /mw, and we have to pay this regardless of use and is only dependent on the ability to generate . Which is why they are used is preference

[samwoollard]

I've just found this video, which does make sense, apart from one bit. The renewable energy markets are sold as cfd's so the government guarantee a cost say £50 per mwh, then if the price is over this then they get the difference. So, surely all of these profits went to our government last year, but if this was the case then you would have thought we'd have some extra money. So I'm still confused at how it works

[ashleigh]

It’s not set by the price of gas, it’s set by the marginal plant. It often happens to be Gas, but that’s time and location dependent. The price is perfectly fine and would arise in any open market as a signal for investment in other sources of generation.

[GodfreyMann]

This video is factually incorrect because it fails to explain that the fight for market share dominance is more important than the actual pricing itself and in a true free markets sees prices fall not stay stagnant.

In the widgets example, the company with the cheaper widgets would seek to dominate the market by squeezing out all competitors and it would do so by lowering its pricing and forcing uncompetitive companies out of business.

What’s been described in this video is NOT a free market, but one in which either (1) the government has intervened to set prices or (2) a market monopoly in which the competitors have fixed prices among each other.

In the case of the UK, it’s the former scenario, where the UK government is acting to: protect legacy companies from having their profits smashed by companies with lower production costs (solar, wind, nuclear, etc). The government has prioritised the investment value of shareholders of failing industries over the suffering caused to poorer households.

Note: energy security requires energy generation for the time being and a free market would not compromise the UK’s energy security, because energy generators will not be wiped out in a free market. What would happen is the market would balance itself: when the sun shines and wind blows then sustainable energy companies will be in the ascendant, but when there’s no/little sun or wind then energy generators would be ascendant.

A free market run in this way would produce the best value electricity for the consumer.