Why does gas set the price, even when coal is cheaper?
The single most counterintuitive thing about how Great Britain prices electricity.
The short answer
Every half-hour, the grid operator takes every generator willing to run, sorts them from cheapest to most expensive, and switches them on in that order until supply meets demand — this ordering is called merit order. The crucial part most people miss: whichever generator is the last one needed — the most expensive one still running — sets the price that every single generator gets paid for that half-hour, not just itself. Economists call this the marginal plant, and the price it sets is the clearing price (sometimes called the system price).
So if a cheap coal plant is running happily at £40/MWh, but demand is high enough that a gas peaker also has to switch on at £70/MWh to cover the last few megawatts, every generator on the grid that half-hour — including that same coal plant — gets paid £70/MWh. Gas didn't get expensive because gas is special. Gas set the price because gas was the marginal plant.
Why it works this way
This isn't an accident or a loophole — it's deliberate, and it's called uniform pricing. The alternative (pay-as-bid, where everyone is paid exactly what they offered) sounds fairer on paper, but it actually encourages generators to guess at the clearing price and bid close to it rather than bid their true cost, which makes the whole market harder to read and less efficient. Uniform pricing gives every generator a simple, honest incentive: bid your actual marginal cost, and if you're cheap enough to be needed, you'll get paid more than your cost anyway — the difference above your own cost is roughly your profit margin that half-hour.
A worked example
Say the grid needs 30GW of power on a given half-hour, and the stack — cheapest first — looks like this:
- Wind & solar: 8GW at ~£0/MWh (weather-driven, essentially free to run)
- Nuclear: 6GW at ~£8/MWh
- Coal: 10GW at ~£40/MWh
- Gas: 6GW needed at ~£70/MWh to cover the rest
8 + 6 + 10 = 24GW, still short of the 30GW needed — so 6GW of gas has to switch on too, taking the stack to exactly 30GW. Gas is the last (and only the last) plant needed, so gas is marginal: the clearing price for the whole half-hour is £70/MWh. The wind farm, the nuclear plant, and the coal plant are all paid £70/MWh too, even though their own costs were far lower — that gap is what makes a cheap, clean generation mix profitable to build in the first place.
Why this matters for your bill
This is also why gas prices move UK electricity prices so much, even on days when gas supplies a minority of total generation. As long as gas is frequently the marginal fuel — the one needed to cover the last slice of demand — a spike in gas prices pushes up the clearing price for every unit of electricity generated that half-hour, coal and renewables included. It's one of the most-cited reasons UK electricity prices tracked European gas prices so closely during the 2021–2023 energy crisis.
See it happen
Reading about merit order is one thing; watching it happen half-hour by half-hour, with your own plants in the stack, is another. In GridTradingDesk you run a small fleet against a live merit-order market — hold a cheap plant back, or push a more expensive one on, and watch the clearing price respond in real time. The glossary has quick definitions for marginal plant, clearing price and the rest of the jargon used here.