Green Energy, Fossil Fuel Prices: Why Are We Still Paying Dirty?

As the United Kingdom races towards net zero, our electricity grid is getting cleaner by the year. Wind turbines now dot the coastlines and rolling hills, solar panels shimmer on rooftops, and nuclear power continues to provide a steady, low-carbon base. And yet, despite this greening of the grid, electricity bills for homes and businesses still hinge on the volatile prices of fossil fuels—particularly gas. This paradox is leaving many asking: why, if clean energy is increasingly dominant, are we still paying fossil fuel prices?

The UK’s Electricity Mix: A Snapshot

According to National Grid ESO, by the end of 2024, around 48% of the UK’s electricity was generated from renewable sources, including wind, solar, hydro, and biomass. Nuclear power accounted for approximately 14%, while fossil fuels, primarily gas, made up about 36%. Coal, once the backbone of the UK’s energy system, now plays only a token role, often less than 1%.

Offshore wind has been the standout performer, with the UK boasting the largest capacity of any country in Europe. In moments of high wind and low demand, renewables can meet more than 60% of electricity demand on their own. And yet, despite this green revolution, the price of electricity is largely determined by the most expensive generator—typically gas.

Why Is Electricity Still Priced This Way?

The UK operates under a “marginal pricing” system for its electricity market. In short, all electricity—whether it comes from a cheap wind turbine or an expensive gas-fired power plant—is paid for at the same price, set by the last and most expensive generator needed to meet demand. This system ensures enough supply by incentivising more costly generators to come online when needed.

While this system made sense in a fossil fuel-dominated world, it becomes harder to justify as renewables take centre stage. When a large share of the electricity mix is low-cost, zero-fuel sources like wind and solar, tying prices to gas appears increasingly out of step with reality. Consumers are rightly confused when their bills go up due to global gas prices, even if most of their electricity came from British wind farms.

What Does It Actually Cost to Produce 1 kWh?

The Levelised Cost of Energy (LCOE)—a standard measure used to compare the cost of generating electricity from different sources—tells a revealing story.

• Onshore wind: £45–£65 per MWh (£0.045–£0.065 per kWh)

• Offshore wind: £70–£90 per MWh

• Solar PV: £40–£60 per MWh

• Nuclear: £90–£105 per MWh

• Gas (CCGT): £100–£140 per MWh (depending heavily on fuel prices)

• Coal: Now rarely used, and much more expensive, both financially and environmentally.

Renewables are now some of the cheapest sources of energy, particularly when fuel costs are considered. The difference in cost is even starker when you factor in the cost of carbon: gas and coal must purchase emissions allowances under the UK Emissions Trading Scheme, further increasing their price.

Is Change Coming?

There is growing political and public support for reforming how electricity is priced. In 2022, the UK government launched the Review of Electricity Market Arrangements (REMA) to explore options to decouple electricity prices from fossil fuel costs. One proposal under consideration is a split market where cheaper, clean electricity is priced separately from gas-fired generation.

Countries like Spain and Portugal have already introduced mechanisms to shield consumers from soaring gas prices by effectively subsidising the difference. The EU is also in the process of overhauling its electricity market to reflect the rising share of renewables.

Is It Justifiable to Keep Things As They Are?

Proponents of the current system argue that marginal pricing supports grid reliability by ensuring flexible generation—mainly gas—is adequately rewarded for stepping in during calm, dark periods. This is especially important until we have widespread energy storage and demand-side flexibility.

However, critics counter that persisting with a system that favours fossil fuel pricing disincentivises the transition. It fails to reflect the real cost of electricity generation today and places an unnecessary burden on consumers, especially during global energy crises.

Moreover, clean energy producers that receive fixed government contracts (like Contracts for Difference) already return excess profits when market prices soar, showing it’s entirely feasible to separate clean and fossil pricing without undermining investment.

A Path Forward

There’s no doubt that energy pricing must evolve with the times. As renewables grow from being supplementary to central, our market structures must shift too. A more flexible, responsive electricity market—one that rewards clean energy for its true value and shields consumers from fossil fuel volatility—is not just possible, but necessary.

Until then, the UK remains in an odd position: championing green energy on one hand, while tethering electricity prices to the old, dirty economy on the other.