It’s 2025. You can whip out your smartphone, open an app and see exactly where the UK’s power is coming from in near real-time. Wind turbines are spinning, solar panels are soaking up rays, hydroelectric is pumping and renewable energy is surging into the grid. So why on earth are UK homeowners still paying electricity prices dictated by gas – the most expensive fuel? It’s ridiculous, outdated and flat-out unacceptable.
The Marginal Pricing Model: A System Stuck in the Past
The UK’s marginal pricing model, a relic from the privatisation of energy companies in the late 1980s, determines electricity prices based on the costliest fuel used to meet demand within any half-hour period – almost always gas. Even if renewables generate the bulk of the power during that time, the price is still almost always dictated by gas. In effect, consumers are paying for the most expensive option, regardless of whether cheaper, cleaner energy sources made up the majority of the electricity supply.
This outdated and unfair pricing system might have been justifiable in the past, but today? It’s a slap in the face for homeowners, especially those who have made the effort to adopt sustainable heating systems like heat pumps, only to find themselves penalised by a model that ignores the reality of the energy mix.
Renewables Are Cheaper – But We’re Not Seeing the Benefits
Renewable energy sources like wind and solar are now cheaper to generate than fossil fuels. As of 2024, over 40% of the UK’s electricity came from renewables. Yet, thanks to the marginal pricing model, we’re not reaping the rewards of this cleaner, more affordable energy. Instead, renewable generators are paid the same inflated rates as gas suppliers, and we, the consumers, are footing the bill.
Real-Time Data Proves This Model Is Outdated
Apps and websites already show us exactly how much electricity is being generated from renewables versus gas at any given time. Why can’t our billing reflect this? Instead, we’re stuck with a pricing model that lumps cheap and clean energy together with expensive fossil fuels. It’s a lazy, one-size-fits-all approach in a world where customisation and precision have become the norm.
Electricity generators, including those using renewables, benefit from inflated prices due to the marginal pricing model. This allows companies to rake in profits while households bear the brunt.
The Spark Gap: Penalising the Sustainable Choice
To make matters worse, electricity is burdened with levies and taxes that are ostensibly intended to support the renewable energy transition. Meanwhile, gas remains comparatively cheap, creating a significant spark gap that actively discourages homeowners from switching to electric heating systems like heat pumps. While we acknowledge that addressing this imbalance won’t be a politically easy decision (given that so many homes in the UK still rely on gas) a solution must be found. Leaving this disparity unchecked undermines the government’s own climate goals and punishes those trying to make greener choices. It’s not just bad policy; it’s a glaring failure of leadership.
Why This Must Change
The UK government needs to scrap the marginal pricing model and adopt a fairer system that reflects the real costs of energy generation. Here’s what must happen:
- Real-Time Billing: Use existing technology to charge consumers based on the actual mix of energy sources being used.
- Fair Levies: Shift green levies from electricity bills to gas bills to encourage cleaner energy use.
- Price Transparency: Make it clear to consumers where their money is going and why.
UK homeowners are already struggling with rising energy costs. Being forced to pay over the odds for clean energy while being tied to an outdated pricing model is beyond unacceptable – frankly, it’s scandalous.
Absolutely! Could not agree more – Great writeup.
Hopefully Octopus and others will continue to push for early changes.
If only Milliband would focus on important things!
@Tim441 Yes, Yes, Yes, Yes and …YES! We all know it, I’m sure all the individual members of all the authorities know it too! What we all don’t seem to know is … When will the appropriate decision makers move on the matter? We have paid for and have put up with this madness for long enough! Regrets, Toodles.
As a post thought, I suppose one very good reason to not ‘shake the boat’ is that the ‘energy UK gravy train’ has some very satisfied travellers on it and they would see no good reason to make changes resulting in a fairer and more equitable system for all the consumers. ‘Don’t rock the boat’ and all that.
I would like to think that Greg Jackson et al can curry enough support amongst the rest to move and shake some sense and fairness into the whole structure. Am I hoping for too much I wonder? Toodles.
I agree. The problem might be the number of smart meters that don’t work. I am on my 4th and have to keep asking octopus to ask DDC for missing data . Hardly a good technology. I have no problem seeing usage using all
other apps
Erm… This going off at a tangent, but I’m still interested to learn about your experiences.
Could you please do one of the following:
a: re-post your comment at the end of this existing topic about Smart Meters
b: start a new topic with a general title such as “Smart Meter failure"
because that will attract others to the discussion in future.
Thanks.
It’s commonly the case that we expect to ‘win an argument’ by force of numbers.
But in this case, I don’t think that’s the crucial factor.
Government policy is to attain decarbonisation of the electricity grid by 2030.
That’s the target which NESO is tasked with implementing.
At some point GB will have to remove the wholesale price of gas from being the basis on which the electricity market operates.
Those of us who have sufficient understanding of the issue can put forward proposals to DESNZ and Ofgem as to the steps required for NESO to hit that target.
Both DESNZ and Ofgem are often operating public consultations…. for which the number of respondents is depressingly low.
But that’s to our advantage.
It doesn’t take many of us Forum Members to submit responses in order for us to have a pretty sizeable proportion of the feedback being sought!
There’s also the Commons Select Committee on Energy Security and Net Zero, who announce inquiries for which we can submit whatever (relevant) evidence we choose.
They don’t currently have an open Inquiry Topic which is relevant to the electricity pricing debacle,
but they will inevitably do so at some point.
If DESNZ and Ofgem aren’t making adequately large steps towards grid decarbonisation, then it’s the Select Committee who hold their feet to the fire.
@Transparent Gas Fire? (sorry)
Oh my word, this is EXACTLY the discussion / argument that I have on a nearly weekly basis (actually more like a daily basis!) with ANYONE WHO WILL LISTEN.
As a totally electric household (no gas, no oil – EV, ASHP) on Agile we should be loving life and feeling quietly smug for doing what we can to help save the world by not drinking down dinojuice.
But it’s costing me WAY MORE than it should! I hear people moan about their heating bills, but when I tell them that on the 10th January my electricity bill was £33 FOR A DAY they look incredulous. And if I hear someone say they’re considering moving to a heat pump – I tell them not to. Not because they’re not great (they are and we love ours) but because until the marginal pricing model, and the associated electricity levies, are sorted out it doesn’t make ANY financial sense.
Electricity is currently 4 times more expensive than gas (6p vs 24p, except when the Agile price went to 99p per kWh. Oh, how we laughed…).
My heat pump, in the depths of winter, isn’t 4 times more efficient than a gas boiler. So it doesn’t take a genius to work out that I would be out of pocket compared to using a gas heating system.
My energy bill for 2024 was just under £2,500 (an average price per kWh of 16p against usage of 14,850kWh), of which heating and DHW made up about £700 of the total (about 4,140kWh during the year). So I’m very pleased with that. BUT I had to go through a steep learning curve in the preceding 4 years until I got things under some sort of control, and the 30 minute pricing structure of Agile isn’t for the majority of people.
We make it work, and I’m now very proud that our energy usage in a 5 bedroom detached house in the middle of a big field (4 people, including twin 18 year old daughters who use 250l of hot water, each, TO WASH THEIR HAIR!!!!!!) is on a par with the published TDCV figures for a 3-bed semi with 3 people living there.
But those same figures project a per annum cost of £1,400 for the 3 bed semi, and I’m paying another £1,000. Same amount of energy used, £1k more spent.
How does that make any sense?
Anyway Mars, thanks for writing these thoughts out. I’m going to be sharing this on with quite a few people…
😀
May I just clarify one point made by @editor…
Not quite.
Electricity Suppliers will first draw on electricity from generators with whom they have a PPA (Private Purchase Agreement).
That price is set by whatever terms were agreed in the contract.
Suppliers whose PPAs are able to offer them more than the forecast demand for any half-hour (HH) period can sell on the surplus to others via the European wholesale market, Exspot, or the UK agency Elexon.
When Suppliers do not have sufficient electricity to meet their demand forecast, each must buy what they require via an auction for each HH.
The auction stops 10-minutes before each HH period starts.
That gives NESO just enough time to schedule which generation sites are to supply how much electricity to the grid…
… and ensure that others are paid to be on ‘standby’ in case there are demand surges.
The last ‘trade’ of the auction is the one which sets the price for all other trades within that HH.
Yes, it is highly likely that the last trade will currently be for electricity from a gas-fired generator (CCGT).
However, it is also the nature of auctions that the price will rise during the trading period.
Those last two statements are unconnected however.
I’m going to stop at that point in order to facilitate discussion.
But I can elaborate further if you wish.
I thought that they brought in CfD to stop this merry go round, but the clowns set the strike price too low and all the value now flows back to the generators meaning that the consumer ends up paying for over priced energy from the spot market.
Ofgem is consulting about their current work programme so perhaps we should tell them to change this system within their work plan.
“Shaping a retail market that works for consumers” Really?
“Establishing a efficient fair and flexible energy system” Really?
Regardless of how the electricity price is calculated, I for one am rapidly loosing faith in the whole drive towards net zero. I am a retired electrical / software engineer so understand the tech side of heat pumps to a certain level.
I would say I am a typical case of someone “retrofitting" (oil boiler is still in the system) a heat pump which has been done to a good standard and I have spent the last two winters fine tuning the system to run efficiently (COP 3.75+ and yearly SCOP of 4.25). I do not have the budget (like a number of households) to install solar panels and batteries to make my heat pump viable and why should I? From a financial perspective solar panels / batteries will take 15+ years in my case to pay themselves off before I start seeing the benefit, I will be 75+ by then and probably not living where I am now, so will be providing the system for someone else’s benefit.
However I am constantly finding the good old oil boiler is undercutting my running costs to the extent I am starting to think there is a conspiracy going on that the Government is advertising to the world it is driving towards net zero but in reality the fossil fuel industry is holding the country to ransom to protect its interests. There again this country has proved time and time again that it could not organise a booze up in a brewery and I cringe every time a Prime Minister says they will make the UK a world leader in something, its embarrassing!
The main issue I am finding with tariffs is they are bias towards EV or heat pumps. If, like me, you have both, then you are financially penalised by one of the technologies. This is not the suppliers fault as they only have a certain amount of wiggle room within the price they pay to the wholesale market.
People ask me is it worth transferring to a heat pump, in the past I would say “yes" but I now say “don’t bother unless you have very deep pockets to fund all the extra associated tech to make it work!". Most people do not have the £12k to put a heat pump in let alone the extra £15k to make it work!
@Mars
A breakdown of the levy split across gas and electricity is in the table below.
I think it makes sense for some of the levy to stay on electricity. The Warm Home Discount isn’t about the energy transition, it is about helping less well off people whatever their heating. I think everyone should contribute to that including heat pump owners. At the very least ofgem could split out the levy so it falls equally on each household irrespective of their choice of gas and electricity as a starter. Any shift will also be transitional as once gas usage falls the levy would have to switch back to electricity.
No government is going to raise national insurance or income tax so there is no chance of these costs shifting out of our bills longer term. There would need to be more bill support for a lot of less well off households if the switch was made now. This would have to be added to bills in some way. Again I think it is right that this support falls on all via electricity. That still leaves a proportion of the levy to switch in the short term until it becomes unviable in the same way we now see annual road tax added to electric cars and the levy on petrol and diesel needed to be replaced at some point.
Care would need to be taken to ensure there were no unintended consequences in terms of profiteering and inflation. This wouldn’t benefit anyone in terms of the wider impact on interest rates, government borrowing or consumer sentiment to the overall Green transition and any potential shift to the right in politics which is happening all over the world. I think the main reason we haven’t seen a change is politics rather than lobbying from the fossil fuel industry. It has been less risky to stay with the status quo.
Green levies April – June 2024
Electricity (£)
Gas (£)
Dual fuel (£)
Renewables Obligation
86
–
86
Feed-in Tariff
21
–
21
Energy Company Obligation
23
34
58
Warm Homes Discount
11
11
22
AAHEDC (GB average)
1
–
1
Green gas levy
–
0.4
0.4
VAT on levies
7
2
9
Total (exc. VAT)
142
46
188
Total (inc. VAT)
149
48
197
Total bill under price cap (exc. VAT)
839
771
1,610
Total bill under price cap (inc. VAT)
881
809
1,690
Levies exc. VAT as % of bill inc. VAT
16%
6%
11%
@Jeff Thank you for proving the above table.
Whilst I absolutely get the need for subsidies to drive the green net-zero ambitions forward (Renewables Obligation, Feed-in Tariffs etc), what I do not understand is why these taxes and levies are applied to the electricity bill (the clean green energy we are trying to incentivise people to move to) rather than the gas bill which is the dirty polluting fossil fuel we are trying to encourage people to move away from? Without financial incentive, people will not (or will be slow to) make the transition to greener energy.
What other industry taxes the new clean alternative rather than the old polluting status quo? Did we massively tax EVs when encouraging people to switch whilst keeping petrol and diesel cheap? No – we tax petrol/diesel vehicles and fuel, and gave tax incentives to EVs.
We need to move more of the financial burden from the electricity bill onto the gas bill to encourage people to move away from gas and towards electricity. Getting the ratio of cost per kWh under 3 to coincide with the average COP of a heat pump installation would be a start (I think a recent study showed it to be around 2.8). If gas prices were to rise to around 7p per kWh and electricity prices fall to around 20p per kWh by moving some of the ancillary costs onto the gas bill, this would go a long way in helping to drive heat pump uptake by making it easy to see that a heat pump installation is always going to be cleaner and cheaper to run.
Ok…. NO! 😁
1. At this stage of the game that would be really problematic. It would provoke unnecessary political push-back from the fossil-fuel backed anti-green lobby which is gaining momentum across Europe. This will be supercharged by Trump and the Tech oligarchs. I’m already seeing this with so-called independent analysts…
2) It sounds great until you dig into it…. You will hammer the crap out of the low-income consumers and tenants who are stuck with gas. They will then either not vote or join the ‘get rid of Ed brigade’. Thus it needs approaching gently and differently. And please don’t take inspiration from Behavioural Economics (which has a dark and dirty history) – ie no ‘nudge’ stuff 😁. Poorer people often don’t get choices. I’ll come back to this….
3) To be fair, the standing charges are clearly broken down on Ofgem’s website and some Energy companies publish their charges as breakdowns. Even the esoteric Octopus Tracker has a formula (for the super geeky)… That gas plant story was horrendously misreported
-0-
OK… until we remove gas as a form of heating and cooking for the majority of the nation we have to keep in mind the policy impact on low income people.
A workable alternative imo is what I have suggested previously: charging banded by use with exemptions for people with mobility problems and the like.
Spain, as I have said before, has three bands – it’s a system that works quite well. A version of this would enable levies to be shifted according to the band also – that keeps costs down for the low income.
Also, while several countries have marginal pricing the percentage of the charge added is lower than the UK’s, in some countries considerably so. Some of our levies are nonsense as I said in my offering to Ofgem – policy tautology. They just need removing not shifting to gas.
Please don’t forget low income people…. It’s not funny only being able to heat damp homes for a few hours at a time, trying to care for growing kids and spending huge amounts on energy bills and watching meters eat your money. I’ll bang the class conciousness drum forever on this.
First: The gas generating plants need regulation – this just couldn’t happen in other European countries where regulation is not a dirty word. But it wasn’t as bad as it sounds…
Second: The market is broken that’s what needs changing. When the Balancing Mechanism called on gas plants the other day it was in part because the available BESS battery storage sold their power elsewhere – they got a better price.. We need to understand that the UK is selling energy as well as buying it and it’s a high-speed, dog-eat-dog market. Interconnectors work in both directions. 🤷🏻♀️
Third: There’s a lot of dirty dealing on the Dutch TTF market (where gas gets traded) that started when the Ukraine war kicked off – (mostly) US hedge funds pumping things up. This gets covered up by analysts and journalists with ‘agendas’ who claim ‘dunkelflautes’ [🤦🏻♀️] or ‘geopolitics’ or ‘storage’…. and then parroted by the gullible rest.
What does this mean? We are forever at the mercy of this nonsense because the entire system is rotten. It won’t be solved by wind farms or solar because the same thing is likely to happen (unless you are off grid, of course).
In Sweden, before Xmas in the north of the country there was outrage during that alleged German ‘dunkelflaute’ week because they have a form of Zonal/Locational pricing and southern Sweden sold the electricity off to Germany (who was desperate) via inter-connectors. The north with all the green energy got charged hugely. The enormous pricing differences around Europe were eye watering as electricity flew around inter-connectors while traders made $$$s
Even Donald Tusk, Mr EU himself, wrote a paper arguing for the markets to be regulated…
It really is the absolute nuts and bolts of the system that need redesigning.
@Lucia While accepting the point about not wanting to disadvantage low income consumers it seems crazy to address the problem through playing around with the energy pricing mechanism. Shouldn’t we have an energy pricing mechanism which achieves the desired energy policy as efficiently as possible and deal with issues of equity and income distribution through the tax and benefits systems?
Mike
Mike – There are strategies whereby both goals could be achieved simultaneously.
One major issue we face is the possibility of having to upgrade the extensive 11Kv distribution grid.
Those costs are not included within the £60bn grid upgrade announced last spring by National Grid.
The red lines in the (anonymised) map are 11Kv
There is sufficient capacity on the 11kV supply network, but it’s a long way short of being able to allow us all to run heat-pumps and EV chargers.
So it needs to be time-sliced.
That, in turn, requires new types of tariff…
… which are currently not available due to the historic regulatory system which sets energy pricing.
Grrr 😡
However, the cost of having to upgrade the 11Kv cabling is extremely expensive, and most likely beyond the capability of the country to pay for it.
There comes a point where Government has to intervene in a process and say “Stop!"
We’ve already seen that with HS2, and the 11Kv upgrade is like “HS2 on steroids“. 😮
One possibility is to fit 10% of homes with storage batteries.
They could be configured to respond dynamically to the 11kV grid which serves that area.
Centralised control isn’t required.
You would normally expect storage batteries to be installed by the more affluent households.
But suppose we did the opposite…
Why not incentivise Housing Associations to put battery storage in all their rental homes?
Those have a high proportion of residents in energy poverty and using pre-payment meters.
It’s not generally appreciated that prepayment Smart Meters are just as capable of handling Time of Use (ToU) tariffs as those found in households with credit accounts.
That would allow GB to avoid the need to upgrade (most of) the 11kV grid,
whilst simultaneously benefiting the more socially-deprived section of the population.
Why not make it a planning requirement that all new build homes have a minimum amount of solar and battery installed, scaled to the size of the property (1kWp per bedroom).
2 Bed property = 2kWp and 2.5kW battery
3 Bed property = 3kWp and 5kW battery
4 Bed property = 4kWp and 10kW battery
Shouldn’t add more than £5-10k to the cost of the build which the homeowner will recoup through lower running costs.
Let’s also make it a requirement to consider roof pitch and orientation when designing new build properties, to try to optimise the amount of south (or east/west) roof space when laying out individual properties on a new build housing estate. How many properties do we see facing south with a dormer roof turning what would have been a great south facing roof into an east/west aspect with less usable/installable space because solar isn’t a consideration.
And install a heat pump too!
That layout also fits one of my wishes that housing is designed around south-facing windows to catch the winter sunshine (when the sun condescends to shine) and minimise east and west facing windows which are subject to considerable solar gain during the summer months. Unfortunately, planners and architects give precedence to appearance over function.
@Old_Scientist My ‘Gut Feeling’ is that the idea should be strengthened somewhat; panels are becoming more efficient and productive so a minimum of 2 kWp. per bedroom please. Having a minimum does not preclude the more clued-up architects from being more ambitious though; after all there is an ever greater need for energy and what better way to produce it than locally? UK winters are unlikely to provide a domestic solar array with sufficient wattage to power a heat pump very much of the time I feel, but every little helps! Obviously storage in a battery would help but we will still be pulling on the grid some of the time I think. Am I being too ambitious? I don’t think so, most of the cost in a solar PV install is for the installation work and scaffolding etc. Carried out at the time of building a property, some of these costs will be minimal – and the price of 2 x panels would be minimal in the scheme of things. The limitation on power production should only be from the lack of more South facing roof surface! I realise that the current inverters may need to be upgraded but, we should think big! Rewards, Toodles.
@JohnR I agree, but that needs to change IMHO.
@Toodles I’m sure there are probably other considerations like the ability of the local grid to handle new solar/battery storage, but any required minimum would at least be a step in the right direction. If it were pitched around the average use for a typical 2/3/4 bed property. Could be something like 4 panels for a 2 bed, 6 panels on a 3 bed and 8 panels on a 4 bed property, with 450-500W panels now commonplace. Or having a minimum annual generation figure (based on PVGIS) would force architects to consider roof layout to meet the required generation, and kill two birds with one stone.
I think if I were looking to move house now, buying a property with substantial solar-friendly roof space would be a major consideration in any purchase.