Britain’s electricity bills are not a net zero problem. They are a gas storage problem.

By Dr Andy Palmer CMG, formerly CEO and COO of Aston Martin and Nissan respectively. Today he is the CEO and Co-Founder of Palmer Energy. 

My timeline has become a chorus of voices insisting that net zero is to blame for Britain’s high electricity prices. Drill more North Sea oil, they say, and all will be fine. This is bemusing, because renewable energy is cheaper than gas, coal or oil. So what is actually going on?

Start with the basics. Electricity prices across most liberalised markets are set by gas. This is not a British peculiarity. It is how the system works almost everywhere.

Most electricity markets use what is known as marginal pricing, sometimes called “pay-as-clear”. Power plants bid into the market in order of their short-run operating cost. The last and most expensive plant needed to meet demand sets the clearing price, and every generator receives that same price, including the cheaper ones like wind, nuclear and hydro. The most expensive source dictates what everyone gets paid.

Gas plants tend to be that marginal unit because they are flexible. They can ramp up and down quickly, unlike nuclear, which is inflexible, or wind and solar, which are intermittent. So even if 60 per cent of a country’s power comes from renewables or nuclear, the final 5 to 10 per cent coming from gas means gas sets the price for the whole market. When gas prices spike due to geopolitics or supply disruption, electricity prices spike with them, regardless of how cheaply the wind was blowing that day. This dynamic is going to matter a great deal in the weeks ahead.

So much for the global picture. The question is why Britain is especially exposed.

The UK carries all the structural disadvantages of the global system, plus several of its own. Gas sets the marginal price in Britain more frequently than in many EU countries. The reasons are straightforward: limited long-duration energy storage, heavy reliance on gas for grid flexibility and an ageing nuclear fleet that has been plagued by outages in recent years.

The single biggest differentiator, though, is gas storage. The UK holds roughly 1 to 2 per cent of its annual gas demand in storage. Germany holds 25 to 30 per cent. The consequence is that British gas prices track spot market volatility with almost no buffer. Any supply shock translates into an immediate price impact on consumers and industry alike. Britain is, in effect, a gas price taker. It imports a large share of its gas, competes with Asia and Europe for LNG cargoes and has almost no capacity to ride out short-term disruption. As global LNG supply tightens and European storage comes under stress, this exposure is about to become very visible.

Grid constraints compound the problem. Britain generates much of its wind power in the north but consumes most of its electricity in the south. When the grid cannot move power efficiently, the system operator ends up paying gas plants to run in the south while paying wind farms to switch off in the north. Those costs get embedded in everyone’s bills.

The picture, then, is not complicated. Electricity prices are set by gas because gas is usually the last unit needed to meet demand. Britain is expensive because it is acutely exposed to volatile gas markets, has almost no storage and passes those costs straight through to consumers.

How did we get here? The UK gas system was built for just-in-time supply. When North Sea gas came onstream in the 1970s and continued through the 1990s, the country developed a model based on high domestic production, daily balancing through pipelines and rapid response from offshore fields. Large seasonal storage looked unnecessary.

Privatisation in the 1980s and 1990s then broke up British Gas, separating storage, supply and transport into distinct commercial entities. Investment decisions became matters of individual company profitability, not national strategy. Nobody was responsible for energy security in the round.

Seasonal gas storage is capital-intensive and has low utilisation. It makes money only during rare price spikes. In a liberalised market, that makes it financially unattractive. Unlike the electricity capacity market, there is no strategic gas storage obligation. If storage cannot justify itself on a narrow commercial basis, it does not get built.

The clearest illustration of this is Rough, which was Britain’s main gas storage facility and provided around 70 per cent of the country’s capacity. It closed in 2017 because of high maintenance costs, required safety upgrades and poor commercial returns. No replacement was mandated. Government chose not to intervene.

Countries like Germany, France and Italy treat gas storage as strategic infrastructure and impose storage fill requirements. Britain chose the opposite model.

Is this lack of investment the fault of net zero policy? No, and this is the point that the online discourse consistently misses. Britain did not stop investing in gas storage because of decarbonisation targets. The closure of Rough pre-dated net zero legislation. When investors explain why they did not build storage, they cite price risk and policy uncertainty, not climate commitments.

The real causes are structural. Privatised and fragmented ownership removed the incentive for strategic thinking. There was no mandate to maintain storage. There was no guaranteed revenue model. Short-term market signals dominated. And successive governments assumed that LNG imports would always be available and affordable. That assumption worked until it did not.

For Britain to break out of this cycle, there are really only two paths. Either we build significantly more gas storage to insulate ourselves from spot price volatility, or we change the pricing model itself and stop setting electricity prices on the basis of gas. Both are serious policy undertakings. Neither has anything to do with abandoning net zero.