Protecting UK Electricity Prices From Geopolitical Shocks

Introduction

Recent global conflicts have repeatedly exposed the vulnerability of electricity markets to geopolitical shocks. The surge in energy prices following Russia’s invasion of Ukraine in 2022 demonstrated how quickly international gas disruptions can translate into domestic electricity price spikes. More recently, tensions in the Middle East involving Iran have again pushed up global gas prices and renewed concerns about energy price volatility in the United Kingdom.

This raises an interesting question: why do wars in distant parts of the world still influence the price of electricity in Britain, even though a growing share of electricity now comes from renewable sources such as wind and solar?

At first glance, this seems puzzling. If large amounts of electricity are generated by wind turbines and solar panels with almost no fuel cost, why should electricity prices rise when gas prices rise?

The answer lies not only in the fuels used to generate electricity, but also in the design of the electricity market itself. The UK electricity market was built around fossil-fuel generation systems where fuel costs dominated the cost of producing electricity. As renewable energy expands, the behaviour of this market design becomes increasingly unusual.

Understanding the issue requires looking at how electricity is bought and sold, how prices are set, and why gas prices still influence electricity prices even when gas produces only a minority of the electricity.