Why wars abroad still drive UK electricity prices?

Gas generates only around 30–40% of UK electricity, yet it sets the price roughly 97–98% of the time .

That’s why geopolitical shocks — from Ukraine to the Middle East — still feed directly into UK electricity bills.

This isn’t just about fuel mix. It’s about market design.

Electricity prices in Britain are set through marginal pricing: the cost of the last plant needed to meet demand sets the price for all generation. Because gas provides flexible backup when renewables are low, it ends up setting the price most of the time — even when most electricity is coming from cheaper sources.

Contracts for Difference (CfDs) are often presented as the solution — and they do help.

They fix revenues for renewable generators. When wholesale prices are high, generators pay back the difference; when prices are low, they receive a top-up. So during gas price spikes, CfD generators return money to the system, reducing consumer exposure.

But here’s the key point that’s often missed.

Today, CfDs still cover only a small share of total electricity demand. Around 22.2 TWh in 2023/24 — roughly 7–8% of demand — meaning over 90% of electricity is still exposed to marginal (gas-linked) prices.

So while CfDs dampen price spikes, they currently don’t come close to insulating the system.

This is changing — but gradually.

As new renewable projects come online under CfDs, coverage rises materially. It could reach around 30% of demand by the late 2020s, and potentially 60–75% or more in the 2030s under higher deployment scenarios .

That’s a significant shift. It suggests the average exposure of consumers to gas-driven price shocks could fall over time.

But two limitations remain.

First, CfDs don’t eliminate gas-driven pricing. Even with high levels of CfD-backed generation, there will be periods when renewable output is low and demand is high. In those periods, the system still relies on flexible generation — and those units continue to set the price.

Second, CfDs are not permanent. Most contracts run for around 15 years . After that, projects typically return to the wholesale market unless new arrangements are introduced.

So the question is not just whether CfDs reduce exposure — they clearly do — but whether they remove it.

The answer is only partially.

They reduce average consumer exposure over time and soften the impact of gas price spikes. But they do not remove the role of gas in setting prices, eliminate exposure during system stress, or provide a permanent structural fix on their own.

The deeper issue is what sets the price when renewables aren’t there.

Until the system has credible alternatives to gas for flexibility at scale, electricity prices will continue to track global gas markets — and geopolitical shocks.

There’s a full paper in the Featured Insight section, if you want to read more.

Curious how others see this — particularly whether CfD expansion is enough, or whether deeper market reform is inevitable.