Marginal pricing is not specific to electricity in UK, that's just how commodities end up priced.
Saudis pump oil at cost of $10 per barrel. Will they sell it to you at $10? Nope. The average oil price? Nope.
Saudis will sell the barrel at the highest price people are willing to pay - the marginal price. So if the most expensive oil needed to match the global oil demand is some super expensive arctic oil project, the oil will be priced according the marginal cost of that project even if only 1% is needed.
Indeed. For others who may wonder why this is the case, a simple example will explain it:
Suppose Saudi can produce 100 barrels at $10 (cost+profit) each, and Brazil can produce 100 barrels at a price of $50 (cost+profit) each, and John wants to buy 120 barrels.
- John will pay what is necessary for his Oil, but seeks out the cheapest price available.
- Sellers Brazil and Saudi will accept a sale of their own production if their minimum price of $50 and $10 is met respectively, but will sell to the highest bidder for their supply.
You'd think John will go to to Brazil to buy 100 barrels at $50, and then buy 20 barrels in Saudi at $10.
But guess what, Brazil could simply go to Saudi and buy their 100 barrels for $10, and then sell them to you for $50.
So now Saudi has demand from both John and Brazil at a $10 price. Who gets to buy? Well whoever decides to bid more to convince Saudi to sell their oil.
If John increases his bid to $15, Saudi will prefer that to Brazil's $10 bid. But Brazil would then increase its bid to $20, knowing they can sell it to John for $50.
This bidding keeps going up until the $50 point. For Brazil there is no longer any profit in buying Saudi Oil at $50, and selling it to John for the same price. For John there is no point in bidding more than $50 for Saudi Oil, because he can get a $50 price from Brazil.
Any point below $50 means a bidding war starts between John and Brazil, because at less than $50, Brazil has a cheaper source of oil (Saudi) than their own production cost.
And this is true for every commodity in a free market. It's not some 'UK system', it's just the consequence of free trade.
Of course in reality it's trading intermediaries that do the bidding, it's not Brazil buying from Saudi, but traders jumping in to arbitrage. But this is a simplified example.
Saudis pump oil at cost of $10 per barrel. Will they sell it to you at $10? Nope. The average oil price? Nope.
Saudis will sell the barrel at the highest price people are willing to pay - the marginal price. So if the most expensive oil needed to match the global oil demand is some super expensive arctic oil project, the oil will be priced according the marginal cost of that project even if only 1% is needed.