The UK energy sector is in the midst of a major period of transition as the National Grid, alongside many other countries in Europe, is turbocharging its transition away from fossil fuels and moving towards renewable energy.
This shift was caused by and will itself cause a degree of turbulence, particularly since there is a very close interconnection between wholesale electricity prices and natural gas.
Within uncertainty lies opportunity, and a business energy consultant can help companies navigate somewhat troubled waters by auditing their energy use, switching to cheaper tariffs and reaping the economic benefits of renewable energy.
However, one particularly unusual aspect of the energy market is that electricity prices, even from renewable sources, are currently still linked to the price of natural gas.
Why is this, what are the effects on business overhead energy costs, and is anything likely to change thanks to an aggressive expansion of renewable energy initiatives?
Why Do Gas Prices Matter?
In 2022, a turbulent energy market became a global crisis thanks to a mix of geopolitical circumstances, most notably Russia’s invasion of Ukraine.
Many people paid significantly higher energy rates, and the existing energy price cap was significantly tested.
Dozens of energy companies went out of business or, in the case of Bulb Energy, entered a special administration regime where the government assumed control in order to manage a takeover by another renewable-focused energy supplier.
This is not the first time geopolitics and military action have led to a widespread price shock in an energy market, as the 1973 Oil Crisis led to a fundamental shift in the energy sector, including the widespread adoption of natural gas for power generation and the first green shoots of renewable energy.
However, the relationship between gas and electricity is complex, with both simple and complex factors that cause one to affect the other and affect your energy bills even if you do not have a gas supply.
Why Do Gas Prices Affect Electricity?
One of the simplest reasons why wholesale gas prices affect electricity costs is because natural gas is used to generate a significant proportion of the electricity used in Britain.
As a 2025 government article explains, the National Grid and the UK’s power system more broadly is particularly reliant on natural gas and has been for decades.
This stands in stark contrast to other European nations, which rely more heavily on either solar power, hydroelectricity or nuclear energy based on their energy policy, leaving them less exposed to volatility in the wholesale gas market.
According to a tracker of the National Grid’s energy generation percentages, almost 30 per cent of the electricity used in the UK last year was generated using fossil fuels, which is down a full ten per cent compared to three years ago.
Whilst this is the simplest explanation, it is not necessarily a comprehensive one, as the link between wholesale gas and wholesale electricity prices is not just related to usage, but also to a process known as the merit order.
What Is The Energy Merit Order?
The price of electricity is set by two main economic processes; these are the merit order and marginal pricing, both of which lead to widely variable price costs per megawatt-hour (MWh).
The merit order is a system where different power plants are ranked by operating costs, including both startup and shutdown costs for generators. The lowest costs, such as wind and solar generators will be used first, followed by nuclear, biomass and finally fossil fuels.
However, the marginal pricing system the National Grid uses means that every generator is paid the cost of the most expensive bid, which is typically the price demanded by the natural gas power plant.
This system came in with the privatisation of the energy market in the late 1980s, using a system that was designed based on the assumption that nuclear, natural gas and coal would be the primary sources of electricity.
This has changed dramatically and has had huge effects on the significant volatility in energy prices, even though the relative proportion of electricity generated by fossil fuels has decreased significantly.
A Financial Times article in 2022, when the proportion of natural gas used for UK electricity generation was 40 per cent, noted that it set the price of power more than 80 per cent of the time, which has led to significant criticism of what is increasingly becoming an obsolete approach to setting energy prices.
A simple solution will be to generate more renewable energy, which will lower the energy prices by not requiring gas, but it is more likely that there will be a change in how energy prices are set, either by separating renewable and non-renewable energy costs or setting prices on a regional basis.
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