Electricity is too expensive, both in absolute terms and relative to the price of gas (the price ratio). Reducing the electricity-to-gas price ratio is the single most important change the UK government can make to help households switch from gas boilers to more efficient electric heating technologies. This is because it shapes real-world decisions for households and businesses: whether it’s cheaper to run a heat pump than a gas boiler, or how attractive electrification looks across different sectors.

In addressing the price ratio, making electricity cheaper is the priority. The price of gas, however, also matters – if gas is cheaper, it raises the price ratio. Volatile gas prices have been a serious problem for the UK economy, and this note proposes a policy solution worth exploring further: a gas price stabiliser.

Volatile gas prices have become a serious problem for the UK’s economy and fiscal position. Gas prices have roughly quadrupled in real terms since 2000, and have seen a number of economically damaging spikes. The Office for Budget Responsibility (OBR) now places wholesale gas prices as a key variable in its economic and fiscal forecasts - and estimates that having three 2022-style gas crises between now and 2050 would raise the UK’s national debt by £337 billion, or 13% of GDP.

As the chart shows, gas prices rose sharply from 2005 to 2008, and helped to exacerbate the 2008 financial crisis. Then they spiked sharply in 2022, precipitating a major period of inflation. They are rising once again in 2026 as a result of the Iran war. And because gas prices have tended to set the price of electricity, the volatility carries over. Although this is becoming less of a factor as we transition to renewables and decouple electricity from gas prices.

Gas price volatility is a problem when prices both rise and fall. The impact of gas price rises on the UK economy is now well understood: rising inflation and consumer bills, a drain on the economy via higher net imports and an increase in government borrowing.

The best response is to electrify, but volatile gas prices are making this harder

The best response to rising gas - and oil - prices is to electrify by replacing fossil fuels with more efficient machines such as heat pumps and electric vehicles. Electrification increases energy security, reduces net imports, reduces carbon emissions and reduces price volatility. If you expect a world of volatile and rising gas prices, electrification is the obvious rational economic response.

But this is where the other side of gas price volatility - falling gas prices - can also be a problem. While lower gas prices can ease pressure on the economy in the short term, they undermine the incentives for electrification. Electrification requires a large amount of upfront investment (in return for lower running costs), and this investment is harder to justify when gas prices (or expectations of future gas prices) are low. Gas price volatility damages the economy, and it also damages efforts to move away from gas.

Could governments do more to combat volatile gas prices? This paper considers three options for a gas price stabiliser, each using fiscal policy to stabilise gas prices. In all cases, HM Treasury would intervene to either subsidise or tax household gas prices if they go above or below the target price.

1. Setting a fixed price for household gas over several years - similar to a Contract for Difference (CfD) scheme for gas
2. Setting a ceiling and floor for household gas prices, to limit the range by which gas prices can fluctuate
3. Setting a floor for gas prices, with any proceeds from gas falling below that price used to subsidise electricity bills

These proposals would have several key economic benefits:

• supporting households with energy bills during cost of living shocks
• reducing the impact of energy bills on consumer prices index (CPI) inflation, keeping it closer to the inflation target
• acting as a fiscal automatic stabiliser, loosening fiscal policy when gas prices are high and tightening it when gas prices fall
• improving the incentives to invest in electrification and reduce the economy’s reliance on gas, by avoiding periods of low gas prices and smoothing the crucial electricity-to-gas price ratio

Under this option, the UK government would effectively fix the household price of gas for a given period. We recommend setting a price at the level of the July 2026 price cap (7.3 p/kWh) for three years.

Under this approach, Ofgem would continue to calculate the retail price of household gas using its price cap methodology. When the price cap is above the fixed gas price, HM Treasury would subsidise consumers to bring prices down to the fixed level, using a similar mechanism to the Energy Price Guarantee. When the price cap is below the fixed level, HMT would apply a tax to bring the price back on target. For households, this would mean that the price of gas would not change for three years - similar to agreeing a fixed energy contract with a supplier.

Outside of energy crises, a retail gas price CfD of 7.3p/kWh would likely involve a small tax, raising revenue for the Exchequer. The weighted average gas unit price from July 2023 to December 2025 was 6.59p/ kWh, which would mean the CfD raising prices by around 0.7p/kWh. This would raise around £1.8 billion in revenue per year, while adding £85 per year to the typical energy bill. The price ratio would be fixed at 3.6 if electricity bills follow their July 2023 - December 2025 average (Nesta recommends other policies to lower the price ratio further).

During an energy crisis, the policy would lower bills and cost the Exchequer. If market gas prices rose to 10p/kWh, this would stabilise the typical bill, saving the typical dual fuel household just over £300 per year, costing HMT £6.7 billion per year. If prices rose to 15p/kWh (still below their January 2023 peak), this would lower a typical bill by around £880 per year at a cost of £19.2 billion per year.

The proposal would also stabilise the price ratio, with an average of 3.6 based on recent average electricity prices. For the period since July 2023, the price ratio would have been lower in all but one price cap period if the household gas price was fixed at 7.3p. This effect would have been particularly important from July 2025 to April 2026, when the price ratio moved up to 4.7 - a fixed gas price would have capped this peak at 3.8.

A price ratio of 3.6 is still above the level of 2.9 which the UK government should be targeting in the short term. However, further action on electricity pricing - such as removing remaining levies and cancelling some electricity debt - would get the price ratio down to 2.9. Crucially, it would then be much easier to maintain a stable price ratio at or below this level with the gas price fixed.

This option would set a range – between 6p/kWh and 10 p/kWh – that the gas price could move between. Above 10p, the UK government would subsidise bills (at roughly the same level as the Energy Price Guarantee), while below 6p it would tax them. The thresholds should be uprated in line with CPI inflation, and could also be reviewed over time depending on government priorities and the market for electrification.

Compared to a fixed CfD price for gas, this option would mean intervening less in gas prices. The household gas price has only fallen below 6p/kWh twice since 2022, in July 2024 and January and April 2026. It has not risen above 10p/kWh apart from during the 2022/23 energy crisis, and is well below that level in the wake of the Iran war, so far.

As a result, the ceiling and floor model would be less effective at smoothing the price ratio. At the floor price (6p/kWh), the price ratio would be 4.4 at recent average electricity prices, far too high to encourage heat pump uptake. At the ceiling price (10p/kWh), the price ratio would fall to 2.6 (assuming no effect from wholesale gas prices on electricity prices).

A third approach would be to set only a floor on gas prices, but to use any proceeds from that floor to subsidise electricity bills. That would mean that, if market gas prices fell below the floor, the price paid per unit by households would not fall, but their electricity bill would fall further.

We would recommend setting the price floor at around 6.5p, and using all proceeds to reduce the unit rate of electricity for all households.

The key advantage of this proposal is that it would lower the electricity-to-gas price ratio at times when gas is cheap - which is the time when electrification incentives are weakest.

The main downside of the proposal is that it would not have the fiscal automatic stabiliser effect, because the proceeds of any tax would re-enter the economy rather than being withdrawn from it.

Benefits

Shielding households from bill rises

Fixing gas prices - especially during the current emerging energy crisis - would provide certainty to households that their bills would not rise above a certain level. This would protect consumer spending and may also help to raise consumer confidence.

Reducing inflation peaks from supply shocks

A gas price stabiliser would limit the rise in CPI inflation from energy shocks. Household gas bills raised the CPI rate by 1.3% during 2022, a major factor in CPI inflation peaking above 11% in October 2022. A gas price stabiliser would have largely prevented this rise.

Conversely, a stabiliser would cause inflation to fall more slowly as gas prices fall, which could cause inflation to stay above target for longer after an energy shock, or could prevent inflation slipping below target in the event of an economic contraction.

However, the stabiliser would operate only on the headline CPI rate, and would likely have the opposite effect on underlying inflation.

A fiscal automatic stabiliser

A fixed gas price would act as a kind of automatic stabiliser for the economy, if the resulting subsidies or taxes add to or reduce government borrowing. During periods of low gas prices, which are likely to be good for the economy, it would raise tax take and slightly lower aggregate demand. During periods of high gas prices, it would help to cap inflation while injecting some subsidy into consumers’ pockets, helping to limit the hit to aggregate demand (the total amount of spending power in the economy).

Improving the incentives to invest in electrification

A fixed gas price would increase the certainty around the case for investing in heat pumps. It would stabilise the electricity-to-gas price ratio, especially since electricity costs are expected to become much more stable in future (as Contracts for Difference schemes become more common and gas plays a smaller role in setting electricity prices). This should make it easier for the government to achieve a price ratio of 2.9 or lower, and to guarantee that households will see lower running costs with a heat pump as with a gas boiler.

Risks

Reducing the price signal to reduce consumption

Fixing the household gas price would dampen the price signal to households to reduce consumption. Rising gas prices are a signal of a supply shortage, and should cause households to reduce consumption. The impact of this price signal is relatively low in the short term, as gas is price inelastic. The OBR estimates short run price elasticity at -0.1 (a 100% increase in price causes a 10% drop in consumption), although other estimates suggest a higher price elasticity of -0.3.

To mitigate this risk, the government could:

• promote electrification to replace gas use - which should be aided by the beneficial impact of the gas price stabiliser on the price ratio
• promote and/or regulate for energy efficiency measures as an alternative way to reduce demand

Potential high costs to the Exchequer

Although a gas price stabiliser should aim to be fiscally neutral over time, there is a risk that gas prices could exceed forecasts, which would increase costs to the Exchequer. There is also a political risk, that governments choose to subsidise bills when gas prices are high, but then face pressure to abolish the fix when underlying gas prices are lower.

To mitigate this risk, the government could:

• set the gas price stabiliser at a higher level, where it is expected to raise money for the Exchequer in the long term
• outsource control of the gas price stabiliser to the OBR, Bank of England or another body independent of government

A gas price stabiliser offers a genuinely promising route to tackling one of the UK's most persistent economic vulnerabilities: the volatility of gas prices and its knock-on effects on inflation, the public finances and the pace of electrification. As this note has set out, the core appeal of the policy is that it could address two problems at once, both shielding households from the sharpest bill spikes and dampening inflationary shocks when gas prices rise. Few policy tools on the table can claim to improve both energy affordability and the electricity-to-gas price ratio simultaneously.

None of the three options set out here is without trade-offs. These trade-offs, and the precise level at which any stabiliser should be set, warrant careful further scrutiny. But the potential prize - a more stable price ratio, a smoother path to electrification, and greater protection for household budgets and the public finances during future energy crises - is significant enough that this idea deserves serious development and consideration ahead of the Autumn budget.