Otis Singleton
Electricity prices have been a significant concern for many households and businesses in recent years. The energy market has been in crisis, with prices rising massively towards the end of 2021 and peaking in late 2022 and early 2023. While wholesale electricity prices declined in 2024, they remain above pre-Covid levels in most regions. Negative electricity prices have become more common in some regions, indicating a lack of flexibility in the system. The conflict between Israel and Iran has also impacted energy markets, with worries about potential restrictions on oil supply affecting prices. The introduction of price caps by energy regulators, such as Ofgem in the UK, has provided some relief to consumers, with prices dropping by 7% in July 2025. However, the complexity of the pricing structure and the impact of standing charges continue to be a concern for many.
| Characteristics | Values |
|---|---|
| Energy prices | Dropped by 7% on 1 July 2025 |
| Electricity prices | Fell in July 2025 |
| Wholesale electricity prices | Declined in many countries in 2024 |
| Average wholesale electricity price in 2024 | USD 80/MWh in Victoria, USD 85/MWh in Germany |
| Negative wholesale electricity prices | Becoming more common |
| Standing charges | Typically fell to 51.37p a day for electricity from 1 July 2025 |
| Temporary costs | Removed for the period 1 July to 30 September 2025 |
| Ofgem's price cap | £1,720 a year from 1 July 2025 |
| Oil prices | $67 per barrel |
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What You'll Learn
The energy price cap
The price cap sets a limit on the rates paid by customers and ensures that prices for people on a standard variable tariff are fair and reflect the cost of energy. The actual rates charged depend on where the customer lives, how they pay their bill, and the type of meter they have. The price cap includes different costs, and any changes to these costs will affect the level of the price cap. For example, if the amount a supplier has to pay goes up, the level of the price cap will also go up.
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Negative electricity prices
While negative wholesale prices occur, negative retail prices are far more rare. Retail prices reflect wholesale prices but also include transmission and distribution fees, taxes, and levies, which make up about two-thirds of the final bill. However, tariff providers that pass on wholesale price fluctuations allow end users to benefit from the peaks and troughs. In some markets, financial incentives for renewable energy production can offset the cost of selling power at negative prices, and businesses can earn money or receive credits for using electricity during these periods.
The occurrence of negative electricity prices introduces volatility into electricity markets, affecting price forecasting and risk management for market participants. This unpredictability can impact both producers and consumers, influencing their operational and investment decisions. Negative prices can strain the financial viability of power plants, deterring investment in new generation capacity and challenging the sustainability of existing inflexible plants. However, they also create opportunities for businesses, particularly large-scale energy consumers, by encouraging the development of flexible generation assets, energy storage solutions, and demand-side management strategies to better align demand with intermittent supply.
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Standing charges
Energy prices have been a hot topic in recent years, with wholesale electricity prices declining in many countries in 2024 after sharp contractions in 2023. However, prices are still significantly above pre-Covid levels in most regions. Negative wholesale prices have also become more common in some regions, indicating a lack of flexibility in the electricity system.
While standing charges may seem like a small part of your energy bill, they play a significant role in ensuring a reliable energy supply. They help cover the costs of keeping your home connected to the energy network and maintaining the infrastructure. However, they can be a burden for low energy users, as they may represent a more significant proportion of their total bill.
Some suppliers offer tariffs without standing charges, but these are rare and typically result in higher per-unit energy costs. Generally, unless your property is frequently unoccupied, a tariff with a low standing charge is often more economical. Ofgem is working to reduce standing charges and plans to introduce zero-standing-charge tariffs from winter 2025/26.
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The impact of conflict
The conflict between Israel and Iran has had a notable impact on electricity prices. With the US backing Israel, there were concerns about potential restrictions on the overall supply of oil, particularly if Iran chose to close the Strait of Hormuz. This strait is a crucial passage between Iran and Oman, facilitating the transport of about a fifth of the world's oil supply. Markets expressed anxiety about the potential for Iran to retaliate by obstructing this strait, which could precipitate a significant surge in oil prices.
However, as of the time of writing, the conflict appears to be de-escalating, with the price of oil barrels settling around $67, similar to pre-conflict levels. This easing of tensions has assuaged market worries about supply disruptions, contributing to the relative stability of oil prices.
The conflict's impact on electricity prices is intricately linked to the potential disruption of oil supplies. Oil is a pivotal energy source, and conflicts that threaten its supply can have ripple effects on global energy markets. The conflict between the US, Israel, and Iran underscores the delicate balance of the energy landscape and how geopolitical tensions can influence electricity prices for consumers.
While the current conflict has not significantly impacted electricity prices, it underscores the vulnerability of energy markets to geopolitical events. It highlights the need for alternative energy sources and supply chain resilience to mitigate the impact of potential supply disruptions on electricity prices and global energy security.
Moreover, the conflict's outcome could still sway electricity prices. Should Iran decide to retaliate by impeding the Strait of Hormuz, electricity prices could escalate rapidly. Markets remain vigilant, monitoring the situation for any signs of escalation that could trigger price hikes.
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The future of energy prices
Short-Term Outlook:
As of July 2025, there is a sense of relief for energy consumers in certain parts of the world, particularly in the UK, as energy prices have witnessed a downward trend. The regulator Ofgem's new price cap has led to a 7% drop in gas and electricity prices, providing much-needed financial respite for households. This reduction translates to an annual price cap of £1,720, down from £1,849 previously. The price cap mechanism, introduced in 2019, aims to protect consumers on variable tariffs from excessive charges.
However, it is essential to recognize that the energy market has been in crisis in recent years, with prices soaring to staggering levels. The cost of living crisis in the UK has been significantly impacted by skyrocketing energy prices, and the recent price cap reduction provides only partial relief. Many consumers are still struggling with energy bills that are nearly double the pre-crisis levels.
Medium- to Long-Term Outlook:
The trajectory of energy prices in the medium to long term is difficult to predict with certainty, but several factors could influence the market. Geopolitical tensions, such as the conflict between Israel and Iran, could disrupt oil supplies and lead to price spikes if key passages for oil transportation are affected. For instance, if Iran retaliates by closing the Strait of Hormuz, through which about a fifth of the world's oil travels, it could have significant implications for global oil prices.
Additionally, the occurrence of negative wholesale electricity prices in some regions, such as South Australia, southern California, Finland, Sweden, the Netherlands, and Germany, is becoming more common. Negative prices indicate a lack of flexibility in the system and can be influenced by various technical, regulatory, or contractual factors. While negative prices are not yet dominant, their growing trend highlights the need for improved flexibility in electricity supply and demand.
Regulatory Interventions:
Regulatory bodies, such as Ofgem, are actively working to address concerns related to energy prices. Ofgem has proposed tackling high standing charges by requiring suppliers to offer tariffs with low or no standing charges. Standing charges are fixed daily fees for having access to energy, and they have been criticized as unfair, particularly for low-energy users and those on lower incomes. Ofgem's plans include providing a choice of price-capped tariffs, one with a standing charge and unit rate, and another with no standing charge but a higher unit rate. However, these proposals have faced criticism for their complexity and potential negative impact on vulnerable customers.
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Frequently asked questions
As of July 1, 2025, electricity prices in the UK have decreased by 7%. This reduction is a result of the new price cap implemented by the regulator Ofgem, which has lowered the average household energy bill.
Electricity prices declined due to the decrease in wholesale electricity prices, which fell by around 20% in 2024 compared to 2023. This fall in wholesale prices was influenced by the drop in global energy commodity prices. However, prices are still significantly higher than pre-Covid levels.
The price cap limits the amount charged per unit of electricity and gas consumed, as well as setting a maximum daily standing charge for being connected to the grid. While the cap helps prevent excessive charges, your total bill will depend on your energy usage. Using more energy will result in a higher bill, even with the price cap in place.
Standing charges are fixed daily fees included in energy bills, which you pay to have access to energy regardless of your usage. These charges are controversial because they disproportionately affect low energy users, who may feel they are unfairly penalized with higher charges relative to their consumption. Some groups advocate for lowering or eliminating standing charges to make energy bills more equitable.
