Closing the UK spark gap: how electricity pricing could unlock cheaper, cleaner energy

Short Summary

This video explains the spark gap in UK energy pricing, where gas costs per kWh are far higher than electricity, and how this barrier hinders the transition to low carbon heating and transport. It dissects the components of gas and electricity prices, highlights the disproportionate policy costs on electricity, and discusses REMA, marginal pricing, and the potential reforms under consideration such as zonal pricing and a green power pool. It covers mechanisms like the Contracts for Difference scheme, the role of renewables, and public investment through GB Energy to reduce wholesale costs. The presenter also emphasizes a just transition, noting upfront costs for heat pumps and EVs, and the need to protect bill payers while accelerating decarbonisation.

Overview

The video investigates why electrification remains expensive in the UK by examining the spark gap between gas and electricity prices, and how policy design and market structure contribute to higher electricity bills despite a cleaner energy mix. The discussion weaves together energy economics, government subsidies, and policy instruments that shape the cost of power for homes and businesses, with an emphasis on how to close the gap to enable heat pumps and electric vehicles to compete with gas and petrol equivalents.

Key Drivers of Price

Gas price is driven by wholesale markets and global events, while electricity costs include wholesale power, network charges, policy levies, operating costs, and VAT. Policy costs in electricity are notably higher than in gas because levies on electricity were intended to fund decarbonisation of the grid, whereas green gas has struggled to gain scale. The marginal price for electricity is typically set by gas-fired generation, which binds the price most of the time, causing electricity to ride on the volatility of gas markets.

Policy Landscape and Market Structures

The UK uses a marginal pricing mechanism and is reviewing electricity market arrangements (REMA) to determine whether to accelerate the current approach or adopt alternative models such as a green power pool or a split market. REMA has concluded that major structural changes risk investor confidence and may delay the energy transition. The Contracts for Difference (CfD) scheme supports low carbon projects by guaranteeing a strike price, reducing risk for developers and lowering long-run wholesale costs as renewables scale up.

Paths to Lower Costs

Lowering the spark gap can come from two routes: making electricity cheaper relative to gas, and expanding renewables under CfD to suppress wholesale prices. The video also discusses new approaches like regional or zonal electricity pricing and the potential for GB Energy to accelerate nascent technologies such as floating offshore wind and hydrogen storage. It also stresses that a just transition must accompany policy changes to avoid leaving households behind due to upfront costs for heat pumps or electric vehicles.

Investment and Transition

Public sector investment is framed as a lever to unlock private capital for large-scale decarbonisation, with a suggested ratio of private funding to public support gradually shifting over time as projects mature. The speaker highlights recent carbon budgets and the Climate Change Committee findings that move from 50 to 95 percent decarbonisation, underscoring that action now can reduce long-term bills for British consumers and businesses.