Why do energy bills in the UK cost so much?

The UK has the highest electricity costs of any wealthy nation

The government's net-zero fervor is blamed by some for that. Why are energy bills so high?

Is energy in the UK actually more expensive? It is. An "awful April" increase in the price cap on domestic energy bills occurred last week. That's already awful enough. The underlying concern, however, is that the UK's persistently high energy prices are seriously jeopardizing entire economic sectors, particularly manufacturing, and clearly endangering the prosperity of the country in the future.

In 2023, the most recent full year for which accurate statistics are available, the cost of one kilowatt-hour of industrial electricity in the United States was approximately 6p. The number for Sweden was 8p. France, 18p. Here, it was nearly 26p.

The UK's recent industrial electricity prices have been more than three times higher than those in the US, nearly twice as high as Japan's, a third higher than Germany's, and more than twice as high as the average for the OECD club of developed nations, according to data from the International Energy Agency. We now pay more than any other wealthy nation of a similar caliber.

What causes the high cost of energy?

Being a net importer of natural gas, the UK is particularly vulnerable to fluctuations in the world market. Furthermore, despite gas's declining share of the total energy mix, the price of gas has historically influenced the price of electricity in this nation far more than in other comparable nations.

For the first time, the majority of the electricity produced in the UK in 2024 came from renewable sources, primarily solar and wind power. A major step toward transforming Britain into a clean-energy "superpower" (one of the government's declared "missions") has been reached.

You would think that prices would be steadily declining because renewable energy is significantly less expensive than fossil fuels. Sadly, there is no indication of that.

Why aren't energy prices in the UK showing any signs of declining?

There are two main causes. First, energy retailers procure their supplies through the auction method. This isn't a free-for-all auction where manufacturers bid against each other to get buyers. It uses a marginal pricing structure, much like some commodity markets, where the most costly power plant required to meet demand sets the "wholesale electricity price" for the entire market.

This illustrates the need to provide incentives for all parties involved to keep the lights on because energy is essential to national security. In the UK, gas plants are the most expensive almost all of the time (98 percent in 2023), whereas the European average for fossil fuels was just 58 percent meaning that energy bills are much higher here.

The UK is becoming better at producing renewable energy, but it is awful at increasing its storage capacity. This is the second reason. Although battery technology has advanced, The Economist claims that the UK's current battery capacity is "far too small to store the volumes of energy needed to make a real dent in electricity prices."

In fact, National Grid, the distribution network, pays wind farms to shut down when it is unable to handle excess supply. "That reduces network expenses, which already make up a sizable portion of end-user bills. By 2030, the government hopes to have quadrupled offshore wind farms, doubled the number on land, and tripled solar power output in order to create a carbon-free grid. Tom Jones claims that those plans are extremely optimistic, especially given CapX's claims to increase storage.

In a volatile world where energy security is becoming more and more important to geopolitics every day, the UK is left as a net energy importer for the first time since the 1970s.

What is the magnitude of net zero?

This is where the heated debate begins. Ineos' billionaire CEO Jim Ratcliffe warns that the once-thriving UK chemical industry is being driven "to extinction" by high energy costs, pointing to the net-zero movement as a major contributing factor. "De-industrialising Britain achieves nothing for the environment," he claims. It just causes emissions and production to move to other locations. According to the counterargument, which was made official by the May government's net-zero target of 2050, taking the lead in decarbonization will ultimately save money by preventing global warming and promoting new green technologies in the UK.

Nevertheless, green levies and other purported "policy costs" undoubtedly raise our overall electricity costs. These include a wide range of insulation and upgrade subsidies and incentives, as well as the green gas levy. ().

Although these expenses don't account for 25% of our bills as is sometimes stated, they are still substantial. Ofgem, the watchdog, claims that policy costs represent roughly 16 percent of the overall price cap for an average household on an electricity-only tariff that pays by direct debit. It is roughly 11% for a household that uses two fuels.

How should we proceed?

According to Pilita Clark of the Financial Times, gas has long set the wholesale price of electricity disproportionately, which is the main cause of the skyrocketing bills in the UK. Redesigning that system would be a clear step forward.

Rob Gross, an energy policy professor at Imperial College, has long advocated for a reorganization that would move nuclear and renewable energy plants from wholesale pricing to long-term fixed-price contracts, similar to those for more recent green energy initiatives.

Taking gas out of the auction-based system by nationalizing gas plants or switching them to a long-term pricing model would be a second, more drastic approach.

Third, green generators that bypass the wholesale market and sell more affordable power directly to consumers could be purchased and operated by GB Energy, the state-owned renewable energy investment body that the government is currently establishing.

Additional suggestions have been made to increase the use of domestically produced gas, implement a zonal pricing system that bases prices on local supply and demand, which would encourage large consumers like factories to relocate to less expensive areas, or increase nuclear power.

What is the best course of action?

Clark asserts that "every idea is contentious." "The energy markets are complicated. Anyone who is serious about lowering electricity costs and supporting British industry, however, needs to address these issues. The mere act of attacking net zero is far from sufficient.