The explanation below was overheard on the BBC’s More or Less, cleverly presented by Richard Vadon – with thanks.
The Garden Metaphor — A Breakdown
Scenario: Richard needs gardeners for the weekend
He doesn’t know how many people he’ll need, but he wants to pay as little as possible while getting the job done. So he decides to use an auction-style system based on how much each person is willing to work for.
The Gardeners and Their Asking Prices
| Person | Asking Price (£/hour) |
|---|---|
| Nathan | £10 |
| Lizzie | £40 |
| Tim | £100 |
Each team member secretly submits the minimum hourly rate they’d accept to do gardening.
How the Auction Works
One Rule: Everyone hired gets paid the same as the highest rate among those selected.
This is how electricity markets work – all selected generators are paid the price set by the most expensive supplier needed.
A Few Scenarios
Scenario A: Richard only needs 1 person
- He hires Nathan at £10/hour.
- He pays Nathan £10/hour.
- Cost: £10/hour
Scenario B: Richard needs 2 people
- He now needs Nathan and Lizzie.
- Lizzie wants £40/hour, so both must be paid £40/hour (that’s the rule).
- Cost: £40 × 2 = £80/hour
Scenario C: Richard needs all 3 — Nathan, Lizzie, and Tim
- You want £100/hour.
- Now everyone (Nathan, Lizzie, and you) gets £100/hour.
- Cost: £100 × 3 = £300/hour
Even though Nathan would’ve happily worked for £10, he’s now being paid £100 — because to get Tim on board, that’s the going rate for everyone.
⸻
Back to Electricity
- In the real energy market, different electricity generators (wind, solar, nuclear, gas, etc.) submit bids to supply electricity.
- The cheapest sources (like wind) might only cost a few £/MWh, while gas is the most expensive.
- But if gas is needed to meet total demand, everyone gets paid the gas price — even the cheap renewables.
This is called “marginal cost pricing”, and it’s how most wholesale electricity markets work in the UK and Europe.