Power is also sold (ok, not sure about the UK) at the market price. So the most expensive generation needed to meet demand determines the market price. So even if gas is a small portion of the generation it could still determine the price.
Electricity prices in the UK (and most other places) are set by the marginal unit, which is the most expensive unit that needs to be turned on to meet demand. All other generation for that time period gets paid the same price. The marginal unit in the UK is usually gas, hence the sensitivity to gas prices
In theory this is what we want: the windfall profits on cheap power during periods of expensive energy are supposed to attract the market to build more of these plants and chase those profits, thereby accelerating the green transition. But it's possible what we saw last year was too much, and that the damage to the economy (nothing strangles economic growth like expensive energy) does more harm than this incentive does good. People are talking about renegotiating power agreements in Europe to pay fixed prices for renewables so this wouldn't happen again, but I haven't heard how likely this is to succeed.
So, for example, on particularly windy days here in Denmark, we pay almost nothing as our entire demand will be covered by wind energy. On other days we might pay a lot since we need to import energy produced from gas or other expensive sources.
If for example you had a cheap source of gas when others put their price up, it would reward you making that info public.
Short term global fuel price spikes are a weak point, though.
I am in the 95th percentile for income (though not wealth) in the UK and here's my energy bill for December:
Daily grid charges £20
Energy used @ market price £315
Truss govt unit price subsidy -£98
Johnson govt flat subsidy -£67
Total bill before VAT £170
Alas, England doesn't allow on-shore wind power, and there's not sufficient capacity (in terms of HVDC lines) to transfer enough power from Scotland down to England to move all of the excess energy.
(I recently asked the same question!)
[1]https://en.m.wikipedia.org/wiki/Market_clearing [2]https://www.sec.gov/Archives/edgar/data/1105055/000110465912...
As users are then paying £90/MWh for gas, does the excess £50 go to the government or to the wind far owner?
However, notice two further considerations:
1. Such contracts eventually expire. Exactly when varies. But the wind farm is still there, just now the energy price all goes to the operator.
2. Older government subsidies were not CfD. Ten years ago if you built a wind farm you got a direct subsidy. The CfD schemes come into existence from about 2014. They're one of a small number of good ideas the Tories had. They're in line with Tory ideology, but they also actually make sense in the world that actually exists.
It's claimed that another type of market would cause companies to speculate with their sell offers and thus generate less electricity. It would be interesting to see how this kind of market would work in reality, though.
Suppose we insist we'll pay less than the price you agree to sell for. Obviously that's not a sale, that's robbery. This problem arises even if we agree to pay everybody the average, because some suppliers didn't bid average, their bid was higher, but we still claimed their electricity, so we are stealing from them.
OK, suppose we decide we'll pay all accepted bids at their bid price regardless of the marginal unit cost. If we do this the supplier is incentivised to guess the bid we will accept, so as to collect the difference between their actual price and the price we're willing to pay. If they're very good at this, we pay exactly the same as now, but, regardless of whether they're good at it the grid is significantly destabilized by the increased uncertainty due to lack of efficient price signals.
What other ideas do you have ?
So the short answer is I have no idea, but I doubt we currently live in the best of all possible worlds.
It seems an odd pricing scheme which isn’t working well as gas becomes less desirable and renewables are a bigger part of the mix.
What you describe as paying at the bid price sounds like a free market to me - if you’re going to have a market mechanism perhaps it should use the market to efficiently discover prices, not impose a very odd pricing structure - if imposing nationwide prices, why have a market at all?
There are many possible alternatives:
Allow prices to float in a completely free market, and force suppliers to hedge (which they do anyway to some extent, but they could be required to).
Nationalise the national grid and energy production
Build interconnects and hydro storage to reduce reliance on gas plants and reduce the problem.
Set prices in regional markets to bring production closer to the areas with peak consumption.
Set prices by energy type (separate markets per type like fusion solar etc taking into account externalities).
Set prices by energy use (baseload, fluctuating, peak)
Defining pricing mechanisms is not robbery it is why we have a regulator!
