Breaking the link: how fixing Britain’s broken energy market could cut bills, inflation and the cost of living
Britain has a very strange energy problem. We’re making more of our electricity from green energy than ever before, the cost of renewable power has collapsed, and yet we’re still being hammered by international gas prices.
Something clearly isn’t adding up.
In 2025, renewables supplied a record 52.5% of Britain’s electricity. Solar and wind are now among the cheapest forms of new electricity generation anywhere in the world. In fact, more than 90% of utility-scale renewable projects built globally in 2025 produced power more cheaply than the cheapest new fossil fuel alternative.
And still our bills are going up.
In July this year, Ofgem raised its price cap by 13% as higher wholesale gas prices caused by conflict in the Middle East fed through to bills. Another increase follows in October.
Different geopolitical crisis, same old problem.
We have allowed the international price of fossil gas to have a huge influence over the price of our electricity, including electricity generated here in Britain from wind and sun. It means events thousands of miles away can raise the price of home-grown green power that has never seen a molecule of gas.
That is the link we need to break.
And here's the thing... this is much bigger than energy bills. The way we price electricity is feeding into inflation, interest rates, mortgages, business costs, economic growth and the wider cost of living.
We’ve designed an electricity market capable of turning a gas crisis into an economic crisis.
That’s why this matters.
For years we were told green energy would be expensive. We were told tackling the climate crisis would mean paying more for everything and that fossil fuels were the cheap, reliable option.
That argument has collapsed.
This is one of the great economic transformations of our time.
Wind and solar don't need fuel. There's no tanker arriving with a shipment of sunshine. Nobody owns the wind blowing across the North Sea and nobody can close the Strait of Hormuz and stop it arriving.
Once the infrastructure is built, the underlying energy source is ours, free and effectively limitless.
That's what actual energy independence looks like.
But our electricity market was designed for another age. We have transformed the technology without properly transforming the market around it, and that means we're not getting the full benefit of the revolution we've already paid for.
The problem sits inside something called marginal pricing, usually described as a “pay-as-clear” market.
Generators offer electricity into the wholesale market at different prices. The system takes the cheaper offers first and keeps going until there is enough power to meet demand. So far, that makes sense.
Then comes the weird bit.
Broadly speaking, all the generators needed to meet demand receive the price of the final and most expensive source required.
In Britain that source is very often gas.
So imagine a wind farm can generate electricity cheaply, but demand means we also need a gas power station running at a much higher price. Gas becomes the marginal generator and its price influences the wholesale price received by other generators as well.
When gas becomes expensive, electricity becomes expensive.
Not just gas-generated electricity. Electricity.
That's how a war, a pipeline failure or some other global fossil fuel shock can end up increasing the value of electricity coming from a British wind turbine.
You couldn't invent a better system for hiding the falling cost of green energy from the people paying the bills.
We saw the consequences after Russia invaded Ukraine in 2022.
Global gas prices went bananas and Britain got hammered.
And because gas had such an enormous influence on electricity prices, the shock travelled straight through our energy system.
The government knew this was happening. Boris Johnson himself described the relationship between gas and electricity prices as “utterly ridiculous”. For once, we agreed.
But instead of fixing the underlying market, the government ended up spending tens of billions of pounds cushioning households and businesses from the consequences.
In other words, taxpayers paid to protect ourselves from the workings of our own energy market.
That's treating the symptom, not the cause.
Our work on Breaking the Link looked at what would have happened if we'd had a different system. The results are extraordinary.
Our modelling found that between 2022 and 2024 the existing market structure added about £46.6 billion to energy costs. Of that, around £33 billion fell on businesses and £13.6 billion on consumers.
In 2023 alone, at the height of the fallout from the crisis, Breaking the Link could have reduced the national energy bill by around £43 billion. That's more than £30 billion for businesses and around £13 billion for households, equivalent to roughly £367 for every household in the country.
Those are already huge numbers.
But they're not the most important numbers.
Because expensive energy doesn't stay inside the energy system.
It goes everywhere.
Energy sits underneath pretty much everything we do.
Businesses need it to manufacture things, refrigerate things, heat buildings, run servers and move goods around. Farms need energy. Shops need energy. Schools and hospitals need energy. Every business supplying those organisations uses energy as well.
So when energy prices go up, those costs work their way through the whole economy.
Prices rise. Inflation rises. Workers understandably want wages that keep pace with the cost of living. Businesses face higher costs again.
Then the Bank of England responds to inflation with higher interest rates. Mortgages and borrowing become more expensive. Consumers have less money in their pockets, investment becomes harder and economic growth takes another hit.
It's a domino run, with the first tile sitting inside our electricity market.
This is why we asked the National Institute of Economic and Social Research to model the wider economic consequences of Breaking the Link using its NiGEM macroeconomic model.
What they found changes the whole nature of the argument.
Had we broken the link in 2023, the modelling suggests inflation could have been around 1.5 percentage points lower. Bank of England rates could have been around 0.7 percentage points lower, growth around 0.5 percentage points higher, and by 2025 nominal GDP could have been approximately £36 billion higher.
That's one energy market reform.
Lower bills lead to lower inflation. Lower inflation means less pressure for higher interest rates. Lower rates mean cheaper mortgages and borrowing. Lower costs mean stronger businesses, more investment and higher growth.
This isn't some niche argument about wholesale electricity trading anymore.
It's economic policy.
And the really important point is that Breaking the Link isn't only useful during an energy crisis.
The same modelling looked at more normal gas-market conditions. Even then, breaking the link could cut inflation by around 0.3 percentage points, reduce lending rates by around 0.1 points and add about £9 billion to GDP.
So there's a benefit when gas prices are normal and a massive benefit when they aren't.
That sounds remarkably like an insurance policy Britain should want.
We didn't fix the underlying problem after Ukraine, and here we are again.
The circumstances are different, but the mechanism is horribly familiar.
The response has been familiar too.
Government has stepped in with measures to soften the blow, including removing VAT from domestic electricity for the financial year.
That helps people now, and with household finances squeezed that's obviously welcome.
But again, public money is being used to protect us from volatile fossil fuel markets while the underlying exposure remains.
How many times are we going to do this?
Every fossil fuel crisis produces another emergency response, another package of support and another discussion about energy security.
Perhaps we should deal with the thing causing the problem.
The government's own numbers make that pretty obvious.
It says gas has gone from setting the wholesale electricity price around 90% of the time in the early 2020s to around 60% now. By 2030 it expects gas still to be setting that price around half the time.
Half.
Calling that Breaking the Link is doing quite a lot of work.
It's progress, definitely. Building more green energy will reduce the amount of gas we use and expanding fixed-price Contracts for Difference will insulate more generation from fossil fuel volatility.
We should do all of that.
But Ed Miliband has acknowledged that simply allowing this process to evolve isn't enough.
He's right.
Because the danger lies in the bit that remains.
If gas is still capable of setting the wholesale electricity price half the time, then Britain is still exposed when international gas prices explode.
And the next fossil fuel crisis won't send us a diary invitation.
Our proposal is to move away from the existing pay-as-clear system towards a properly designed pay-as-bid approach, where generators are paid according to the bids they make rather than automatically receiving the price of the most expensive generator required.
The principle is straightforward: electricity generated cheaply should be capable of being sold cheaply.
That sounds almost embarrassingly obvious.
For decades Britain has talked about energy security as though it means finding another hole to drill.
It doesn't.
North Sea oil and gas are sold into international markets at international prices. Producing more here does not magically give British households cheap gas.
And there will always be another global crisis somewhere.
That's the nature of fossil fuels. They have to be extracted from particular places, processed, transported and traded through international markets. Their price is vulnerable to wars, sanctions, political instability and the decisions of governments we have absolutely no control over.
The wind doesn't work like that.
Neither does sunshine.
We have one of the best renewable energy resources in Europe sitting around us every day. Harnessing it gives us cleaner energy and a lower carbon footprint, obviously. But the economic case is every bit as important.
Green energy offers Britain something fossil fuels cannot: the ability to produce far more of the energy we need ourselves, at increasingly predictable costs.
That is real energy security.
But to finish the job we have to reform the market as well as build the infrastructure.
Otherwise we'll arrive at the slightly absurd situation where Britain has built a largely green electricity system but is still allowing the dwindling fossil fuel part of it to dictate prices whenever gas is needed.
Breaking the Link also exposes something important about the political argument around net zero.
The Tories and Reform like to blame green energy for high bills.
It's almost precisely backwards.
When Ofgem announced July's price increase, it said growing renewable generation meant electricity prices rose much less sharply than gas prices.
The problem is not that we've built too much renewable energy.
It's that we haven't finished rebuilding the system around it.
We have a 21st-century electricity supply being priced through rules rooted in the fossil fuel age.
And that matters enormously because the green transition isn't simply an environmental programme.
It's one of the biggest economic opportunities Britain has.
Cheap, clean, home-grown power can make British industry more competitive. It can reduce our exposure to geopolitical shocks. It can bring greater stability to household bills, take pressure off inflation and create the conditions for lower borrowing costs.
That's quite a prize.
And unlike most big economic reforms, we don't have to invent the technology required to get there.
It's already spinning in fields and offshore.
We all know the problem now.
The last energy crisis showed us.
This one is reminding us.
International fossil fuel prices leave British households and businesses exposed to events we cannot control. Our electricity market amplifies that exposure by allowing gas to exert far too much influence on electricity prices.
And the consequences don't stop with the energy bill.
They travel through inflation, interest rates, mortgages, business costs, poverty and economic growth.
Breaking the Link won't solve every problem in the energy market. Nobody sensible would claim it will.
But it tackles one of the most perverse features of the system and allows us to capture much more of the economic benefit of the green energy revolution already underway.
The government has accepted the diagnosis. It is moving in the right direction and weakening the influence of gas.
Now it needs to go further.
Because having gas set the price half the time instead of 90% of the time is better.
But it's not Breaking the Link.
We have the resources. We have the technology. We have some of the cheapest sources of new power available anywhere and an endless domestic supply of wind and sun.
What we're missing is an energy market designed for the world we're moving into rather than the one we're leaving behind.
Break the link between green electricity and fossil gas and the prize isn't just cheaper power.
It's lower inflation, greater economic stability, stronger businesses, more genuine energy independence and a lower cost of living.
That's the kind of systemic change we should be getting on with.
And there's really no good reason to wait.
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