Why Britain’s electricity bills are some of the highest in the world

Energy-intensive manufacturers have been hit hard, leading to the closure of factories such as the CF Fertilisers plant in Billingham, and the Ineos oil refinery in Grangemouth; the steel industry is on its knees. Lowering energy bills is one of the current Government’s core “missions”, but the short-term outlook isn’t great, with the typical domestic bill set to be 44% higher this winter than four years ago.

Why are British prices so high?

The short-term cause is the Ukraine War. The average household “duel-fuel” bill (of which electricity makes up a bit more than half) went from around £1,200 per year in 2020 to £3,549 in October 2022, then down again, before creeping up to £1,720 now. The underlying causes are complex: they include an ageing national grid; high network operating costs; a lack of storage; and the practicalities of being on an island (in Europe, electricity can be transmitted to where it’s needed more easily). Finally, there are “policy costs”: levies to support green energy and vulnerable customers. Of a typical electricity bill, under Ofgem’s price cap (the highest tariff providers can charge), about 20% consists of network costs; 15% is the energy supplier’s costs; 11% is policy costs; 5% is VAT; and suppliers’ profits are 2.4%. But the biggest chunk, around 45% of a bill, is the wholesale cost of energy, which is largely dictated by the price of natural gas, which is both high and volatile, for reasons beyond government control.

Why is it underpinned by the price of gas?

UK non-fossil fuel sources – wind, solar, hydroelectricity, bioenergy and nuclear – generated around 58% of the UK’s electricity last year, with wind alone providing around a third of the country’s power since 2023. And wind and solar are, in theory, very cheap. However, much electricity for the grid is bought short-term, with an auction for every half-hour period, and the price is determined by the most expensive provider for that moment. Electricity is bought from generators – wind farms, power plants – in “merit order”: cheapest first. But the price for all is set by the last or “marginal” generator needed; and in the UK that’s almost invariably a gas-powered turbine. This is known as “marginal pricing”.

Why on earth use this system?

Electrical grids must be exactly balanced between supply and demand. In the UK, gas-powered plants are the only practical means of topping up the grid during a sudden shortage. Nuclear reactors can’t quickly be switched on and off; wind and solar are intermittent, and we can’t yet store enough of their output. For now, the only way to be sure of keeping the lights on when there’s a surge in demand involves gas. As a matter of economics, many, from Boris Johnson to the energy supplier Octopus, have questioned marginal pricing. But both Labour and Tory governments have concluded that it is the most efficient system; it is used across most of Europe and the US.

So how much do renewables cost?

In theory, the green part of “policy costs” comprises under 10% of our electricity bills. But the true price is much higher. Connecting the grid to wind and solar farms is expensive, as is back-up and grid-balancing. In 2024/25, about £2.7bn was spent balancing the grid – for instance, paying wind farms to “curtail” generation when the system was overloaded. Besides, high gas-derived prices often govern real renewable prices anyway. The UK relies heavily on gas, because it got rid of coal-fired stations. Marginal pricing means gas set the price of electricity 98% of the time in Britain in 2023, compared with the European average of 58% (in France, prices are mostly set by cheaper nuclear, and in Poland, by coal).

What is the Government’s solution?

To help industry, Labour is exempting around 7,000 companies from some levies, with extra support for those in energy-intensive sectors such as chemicals, steel and glass. But its long-term plan is to take gas largely out of the electricity system: to reach “grid net zero” (95% carbon-free electricity) by 2030. The UK will need about twice the generating capacity as it did pre-renewables, and a much more complex, dispersed grid. It is investing several billion pounds in renewables, aiming to double onshore wind capacity, triple solar and quadruple offshore wind by 2030; it is also investing heavily in nuclear, in projects such as Sizewell C in Suffolk. At the same time, it aims to improve network capacity and boost grid storage, with vast batteries and pumped hydropower. The hope is that, in the future, the marginal price will seldom be set by gas – greatly driving down UK energy costs, cutting emissions and creating high-quality green jobs.

Is this realistic?

Many are sceptical. Dieter Helm, the Oxford energy economist, doubts that renewables will reduce bills long-term. Decarbonising the grid by 2030 would be a massive undertaking. Big British infrastructure projects usually run hugely over budget and schedule. Mechanisms for balancing a mostly renewable grid are untested, and will be expensive. Vast amounts will need to be invested – which will come, ultimately, from Britain’s electricity bills. Manufacturing is likely to be lost to nations with cheaper power. Although reducing emissions is a worthy aim, if those emissions only go abroad, it won’t help the climate. Helm thinks it would be better to move more slowly, and to be cautious about phasing out fossil fuels.

Marginal pricing: the alternatives

The present Government has looked into having a “split market” – separate pricing systems for renewables and the rest. A linked idea, which has been pushed and fought against by opposing armies of lobbyists, is “zonal pricing”: replacing a single national price for electricity with different prices for different zones, lower in areas with cheap generation nearby.

Industrial areas such as Teesside and Grangemouth that are near offshore wind farms could, with lower prices, attract energy intensive industries such as steel, fertilisers, or data centres. Wind farms would no longer need to be paid to be turned off. Octopus Energy CEO Greg Jackson thinks the scheme would bring costs down by £5bn a year. The Government rejected zonal pricing in July. It was deemed too politically difficult: it would risk creating a “postcode lottery”, with customers in some regions paying more than others. Ministers also concluded that it would be too difficult to implement. Marginal pricing is a fiendishly complex issue, but it was thought to be the best method of setting prices in a way that incentivises investors and generators, and ensures a reliable supply. Ministers are nervous of anything that might interfere with security of supply.