Wiktor Wise
Electricity prices have been a hot topic in recent years, with prices spiking across the globe. In the US, for example, the cost of natural gas is a primary driver of wholesale prices, and these costs are expected to increase by 24% in 2025. In the UK, energy prices rose on the 1st of April 2025, and while bills may tumble when the new price cap is announced for July to September, prices are predicted to remain relatively flat over the next three years. This is due to a range of factors, including supply and demand issues, the war in Ukraine, and the high cost of natural gas.
| Characteristics | Values |
|---|---|
| Electricity prices | Surging |
| Reason for surge | High gas prices, insufficient government support, low gas reserves, supply and demand issues, inflation, high interest rates, war in Ukraine, etc. |
| Region | Worldwide: US, UK, Australia |
| Government intervention | Fuel Direct Scheme, affordable payment plans, repayment holidays, hardship grants, etc. |
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What You'll Learn
The role of the government
- Independent Regulation: When the electricity industry is privatized or capitalized, or when competition is introduced, independent regulation becomes necessary. This is because the electricity sector is imbued with the public interest, and governmental oversight is required to ensure that broad-based public services are provided effectively. The Federal Energy Regulatory Commission (FERC) in the United States is an example of an independent regulatory body that oversees wholesale or bulk transactions in the electricity market.
- Price Stability and Consumer Protection: Governments often intervene to stabilize electricity prices and protect consumers from excessive price increases. This can include setting price caps, as seen in the UK and France, or freezing retail prices, as California did during its energy crisis in 2000.
- Renewable Energy Promotion: Governments can play a significant role in promoting renewable energy development. They can mandate that distribution companies include a certain amount of renewable energy in their portfolios by entering into long-term power purchase agreements with renewable energy project sponsors. While this may result in higher energy prices in the short term, it can also provide economic benefits once the capital costs of renewable projects are retired.
- Fiscal Incentives and Investment Frameworks: Governments can provide fiscal incentives to encourage renewable resource development. For example, legislation can require electric utilities to purchase energy at a price equal to the "avoided cost," establishing a more objectively determinable level of prices for project outputs. Laws can also create a sound framework for private capital investment in renewable energy projects by providing certainty of revenues and concrete guidance on rates payable for infrastructure goods and services.
- Resource Regulatory Regime: The government has a role in establishing a resource regulatory regime to manage certain national resources, such as geothermal and hydro, that are held in trust for the benefit of the populace. This may involve imposing indirect taxes on electricity users to fund the regulatory costs associated with resource development.
- Energy Policy and Market Intervention: In some cases, governments may intervene in energy markets or implement energy policies to influence prices. For example, during his 2024 presidential campaign, Donald Trump promised to halve energy and electricity costs by increasing domestic production, reducing renewables, and loosening environmental regulations. However, experts expressed doubts about the likelihood of achieving such a significant reduction in energy costs.
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Supply and demand
The laws of supply and demand play a significant role in determining electricity prices. When the supply of energy is low, prices tend to increase, and when supply levels are higher, prices usually decrease. Similarly, when demand is high, prices increase, and when demand is lower, prices tend to fall.
Various factors influence the supply and demand of electricity, leading to price fluctuations. For instance, the cost of natural gas is a primary driver of wholesale prices in many regions, as natural gas often fuels the marginal generator. The price of renewable energy is also linked to the price of gas in certain areas, such as the UK, resulting in higher prices for renewable energy when gas prices surge. Additionally, network costs, including the transportation of power through poles and wires, contribute to rising electricity prices due to increased material and labor expenses driven by high-interest rates and inflation.
The pandemic, the war in Ukraine, and other global events have caused significant supply and demand shocks, leading to price volatility since 2020. These events have disrupted energy markets, causing price increases. For example, the UK has faced issues with low gas reserves, insufficient government support, and the collapse of energy suppliers due to unsustainable business models.
In the US, wholesale power prices are expected to increase in most regions in 2025 compared to 2024, except for Texas and the Northwest. The average residential electricity price is projected to rise by 2%, although it will remain relatively unchanged after accounting for inflation. Similarly, in the UK, energy prices rose on April 1, 2025, due to the latest energy price cap. However, there is a forecast for a potential decrease in energy bills later in the year, driven by a decline in wholesale gas and electricity prices due to milder temperatures reducing demand.
To mitigate rising electricity prices, several strategies can be employed. Increasing renewable energy generation, such as solar and hydropower, can help drive down wholesale power prices. Additionally, individuals can consider energy-saving measures and assess their energy usage patterns to reduce their overall consumption and lower their electricity bills.
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Geopolitical factors
Wars and Political Conflicts: Geopolitical conflicts, such as the war between Russia and Ukraine, have disrupted energy supplies and caused price volatility. The political unrest between Russia and Ukraine, for example, impacted the supply of natural gas to Europe, as pipelines transit through Ukraine and Belarus.
International Trade Policies and Sanctions: Trade policies and sanctions can also affect energy markets. For instance, Western sanctions on Russia after the annexation of Crimea in 2014 hindered their ability to invest in energy infrastructure. Additionally, the Organisation of the Petroleum Exporting Countries (OPEC), a group of oil-producing nations, can influence the global oil market and prices through their policies and production decisions.
Geopolitical Competition in Clean Energy Supply Chains: The shift towards renewable energy sources has introduced new geopolitical dynamics. Countries rich in raw materials required for renewable technology, such as lithium and cobalt, have leverage in the global clean energy supply chain and can impact prices.
Speculative Buying: The threat of future disruptions due to geopolitical tensions can lead to speculative buying, further driving up prices.
Regional Disruptions and Pipeline Politics: Geopolitical events can trigger regional disruptions, particularly in natural gas markets in Europe and Asia, where reliance is high. Natural gas, supplied through pipelines, is vulnerable to geopolitical risks.
Global Oil Market: Oil remains a critical energy source globally, and geopolitical events can significantly impact oil prices. Many oil reserves are concentrated in politically volatile regions, such as the Middle East, making prices susceptible to instability.
It's worth noting that while geopolitical factors can influence electricity prices, other factors also come into play, such as fuel prices, power plant costs, weather conditions and demand, and local fuel costs. The interaction of these factors with geopolitical dynamics shapes the electricity prices experienced by consumers.
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Cost of wholesale power
The cost of wholesale power is influenced by several factors, including supply and demand, fuel prices, government policies, and market conditions. Let's delve into the details:
Supply and Demand: The law of supply and demand significantly impacts wholesale power prices. When there is a shortage of energy supply, prices tend to increase. Conversely, when supply levels are higher, prices often decrease. The same principle applies to demand; when demand is high, prices rise, and when demand is lower, prices usually fall. For instance, in February 2025, New England experienced below-average temperatures, leading to spikes in wholesale electricity prices in the region. Texas and the Northwest also witnessed a large range of wholesale electricity prices during the same month due to cold temperatures.
Fuel Prices: The cost of fuel, such as natural gas, plays a crucial role in determining wholesale power prices. In the UK, the price of renewable energy is linked to the price of gas. Therefore, when gas prices surge, renewable energy prices follow suit. For instance, gas prices in 2021 were approximately double the previous year's, contributing to higher electricity prices.
Government Policies: Government interventions can influence wholesale power prices. For example, France capped electricity price increases at 4% until the end of 2024. In the US, Trump's 2024 presidential campaign promise to halve energy and electricity costs within 12-18 months could impact wholesale prices. However, experts doubt the likelihood of achieving such a significant reduction.
Market Conditions: The energy market's health and stability affect wholesale power prices. For instance, the war in Ukraine has contributed to price pressures on energy. Additionally, the performance of the labour market can influence consumer spending on energy. A strong labour market allows consumers to absorb cost increases, while a cooling labour market may lead consumers to reduce discretionary spending to manage energy costs.
Wholesale Price Projections: Energy consultancy Cornwall Insight predicts that energy bills will decrease when the new price cap is announced for July to September 2025. They also forecast that prices will remain relatively stable over the next three years before dropping after 2028, as renewable energy output improves. However, they caution that wholesale prices may remain elevated compared to the previous decade, even by 2031.
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Household income
The impact of these rising electricity prices is particularly hard on low-income households, who may struggle to keep up with the higher costs. In recognition of this, the Household Support Fund, introduced in September 2021 to aid vulnerable customers, has been extended until March 2026. Additionally, the Warm Home Discount scheme continues to offer discounts to eligible pensioners and low-income households.
While some sources predict that electricity prices will continue to rise in 2025, the rate of increase is expected to be lower than in 2022 and 2023. This forecast is based on the assumption that the supply issues causing the price hikes will be resolved in the short term. However, there are concerns that electricity prices will not decrease significantly due to underlying issues with the electricity supply chain, such as the outdated and inefficient central grid system.
The transmission of electricity has been identified as a significant contributor to cost spikes, and there are calls for modernisation to reduce these costs. Additionally, the Bank of America research note points to a nearly 2% increase in electricity prices over the past year, with a 4.9% increase in natural gas prices.
Rising electricity prices are also influenced by increasing consumption. Homeowners across the US are receiving the highest electricity bills of their lives, driven by rapid utility rate hikes and high electricity usage. This trend is expected to continue, with a forecast that the average homeowner will pay nearly $950 more per year by 2040 and an additional $1,900 by 2050.
To mitigate the impact of rising electricity prices, some customers are opting for fixed-price deals, which offer the security of a set rate for a specified period. However, customers should be aware of potential penalties for leaving a fixed deal early and ensure they understand all the associated costs.
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Frequently asked questions
Electricity prices are rising due to the high cost of wholesale power, which is driven by the cost of natural gas. Other factors include supply and demand issues, the pandemic, and the war in Ukraine.
Energy consultancy Cornwall Insight predicts that energy bills will fall when the new price cap is announced for July to September. However, they also forecast that it could take several years for energy bills to return to pre-2020 levels.
To reduce your electricity bill, you can consider switching to a fixed energy tariff or installing solar panels to increase your renewable energy output. Additionally, you can contact your supplier to discuss affordable payment plans or repayment holidays if you are facing financial difficulties.
