High costs of electricity and gas bills in the UK: an explanation
The United Kingdom currently faces significantly higher energy costs compared to several other developed nations, leading to concerns about the potential crippling impact on various sectors, particularly manufacturing, and the nation's long-term prosperity.
In 2023, the last full year with reliable data, a kilowatt-hour of industrial electricity cost around 6.5 pence in the United States. In Sweden and France, the figures were 8 pence and 18 pence, respectively. The UK, however, saw a considerably higher price of nearly 26 pence.
According to data from the International Energy Agency for industrial electricity, recent prices in the UK have been over three times those in the US, nearly double Japan's, and around a third higher than Germany's. The UK currently has the highest prices among comparable rich countries.
Several factors contribute to the UK's high energy prices. The country is a net importer of natural gas and is more exposed to the volatility in the global market. The price of electricity in the UK has traditionally been highly influenced by the gas price, more so than in other similar nations, despite the declining role of gas in the overall energy mix.
In 2024, renewable energy sources, primarily wind and solar power, generated more than half of the UK's electricity. This marked a significant milestone in Britain's ambition to become a clean-energy leader. However, despite the lower costs of renewable energy compared to fossil fuels, there has been little sign of decreasing energy prices.
Two main reasons account for the lack of falling energy prices. Firstly, the auction method used by energy retailers to source their supplies leads to higher costs. This system is not a free-for-all auction, but a marginal pricing one, where the price for the entire market is set by the most expensive power station needed to meet overall demand.
Gas plants are usually the most expensive source, accounting for almost 98% of the time in 2023, while the European average for fossil fuels was only 58%. This price disparity is a significant factor in the UK's high electricity bills.
The second reason for high energy prices is the UK's limited ability to scale up its storage capacity for renewable energy. Despite improvements in battery technology, the current capacity is insufficient to store the necessary energy volumes to significantly reduce electricity prices.
Indeed, the National Grid often pays wind farms to shut down when there is a surplus supply. This practice raises network costs, which already account for a substantial portion of end-user bills.
The government aims to achieve a carbon-free grid by 2030 with ambitious plans to quadruple offshore wind farms, double the number on land, and triple solar power production. However, these plans face skepticism, with critics arguing they are overly optimistic.
The debate over the role of the net-zero drive in high energy bills is contentious. Jim Ratcliffe, CEO of Ineos, claims that high energy bills are pushing the UK's once-thriving chemical industry to the brink of extinction and cites the net-zero drive as a key factor. In contrast, those supporting the net-zero target argue that leading on decarbonisation will save money in the long run by fostering new green technologies and avoiding environmental damage.
Regardless, green levies and other policy costs do add to electricity bills, although they do not account for 25% of the total, as sometimes claimed. According to the watchdog Ofgem, for a typical household on an electricity-only tariff paying by direct debit, policy costs amount to about 16% of the total price cap. For a dual-fuel household, it's about 11%.
Several potential solutions have been proposed to address high energy prices, including overhauling the system to better integrate older renewables and nuclear plants, removing gas from the auction-based system through nationalization or long-term pricing models, and allowing state-owned renewable energy investment bodies to sell more affordable power directly to consumers.
Ultimately, the complexities of energy markets require careful analysis to find effective solutions for reducing power bills and boosting British industry. Simply attacking net zero is not a sufficient solution.
The high energy prices in the UK are a cause for concern for the nation's business sector, including manufacturing, as they could potentially cripple long-term prosperity. This issue arises from the country's reliance on expensive energy sources like natural gas and higher costs in the finance sector associated with the auction method used by energy retailers.
In order to find effective solutions for reducing power bills and boosting British industry, it's essential to consider potential strategies such as overhauling the system to better integrate older renewables and nuclear plants, removing gas from the auction-based system through nationalization or long-term pricing models, and allowing state-owned renewable energy investment bodies to sell more affordable power directly to consumers.
