Otis Singleton
The UK has some of the highest electricity prices in the world. This is due to a variety of factors, including the country's reliance on gas, the pricing system, supply and demand issues, and the cost of renewable energy projects. The UK's electricity market price is set by gas 98% of the time, which is the highest rate across Europe. This means that when gas prices soar, electricity prices do too. Additionally, the UK's infrastructure makes it costly to build interconnectors with continental Europe, limiting the ability to import cheaper electricity. The country also lacks transmission capacity, resulting in high costs that are passed on to consumers.
| Characteristics | Values |
|---|---|
| Average price of electricity for a typical household in Great Britain in 2024 | 30p per kilowatt hour (kWh) |
| Average price of electricity for a typical household in Northern Ireland in 2024 | 27p per kilowatt hour (kWh) |
| Energy price cap in early 2025 | £1,928 per year for a household using a normal amount of energy |
| Average annual bill for typical gas and electricity consumption in April-June 2025 | £1,849 |
| Average price of electricity in April 2025 | 27.03p per kilowatt hour (kWh) |
| Average standing charge for electricity in April 2025 | 53.8p/day |
| UK's marginal pricing system | The price of electricity is decided by the most expensive source needed to keep up with demand |
| Gas power plants | Often used when demand is high, setting the market price for electricity |
| Wholesale electricity prices | Increased in 2022 due to the energy crisis caused by the war in Ukraine |
| Renewable energy projects | Receive payment according to the market price, not their actual strike price |
| Heat pumps | Promoted by the government as an alternative to gas boilers, but they use electricity and save energy |
| UK's reliance on gas | Gas sets the wholesale price of electricity in the UK 98% of the time |
| Curtailment | An increase in the number of balancing actions that NESO needs to take, mainly relating to “constraints” on the network that result in wind projects being paid to switch off |
| Grid connections between Scotland and England | Expected to add to transmission charges while cutting balancing costs |
| Balancing costs | Paid by consumers since 2023 |
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What You'll Learn
The UK's dependence on gas
The UK's electricity costs are high due to the country's reliance on gas. Gas-fired power plants set the market price for electricity, making costs higher than they could be. The UK's electricity market price is dictated by the most expensive source of generation available, which is gas-fired power plants 98% of the time. This is due to the UK's unique pricing system, where the price of electricity is set by the highest accepted bid.
Gas is currently the largest single source of electricity generation in the UK, but this is expected to change as the country transitions to cleaner energy sources. The UK government has set a target for all electricity to come from 100% zero-carbon generation by 2035. In 2023, wind power contributed 29.4% of the UK's electricity generation, while nuclear power contributed 14.2%. The UK also has plans to increase offshore wind output to 50GW by 2030 and solar capacity is expected to grow to roughly 70GW in the same period.
The UK's reliance on gas is also influenced by its energy infrastructure. Gas-fired power plants are the only type of electrical power station that can be turned on and off quickly, making them essential to meeting demand when renewable sources like wind and solar are insufficient. However, this flexibility comes at a cost, as the price of electricity is tied to the volatile price of gas.
To reduce its dependence on gas, the UK needs to invest in renewable energy sources and storage technologies. By increasing the use of wind, solar, and hydroelectric power, the UK can reduce its reliance on gas and lower electricity costs. Additionally, storage technologies like pumped hydropower projects can help store renewable energy during abundant periods and release it when supplies are tight.
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The bidding system
The UK's electricity prices are determined by a complex interplay of factors, and one critical mechanism is the bidding system employed in the energy market. This system, known as "marginal pricing," plays a significant role in influencing the cost of electricity for consumers.
In this bidding system, the pivotal factor is the cost of the most expensive source of electricity generation, which is typically gas-fired power plants. This dynamic occurs because gas-fired power plants have the flexibility to quickly adjust their output to meet demand, whereas nuclear power stations serve as a "baseline" power source and renewable sources like wind and solar are subject to weather conditions. As a result, gas-fired power plants often set the market price for electricity, making the UK highly reliant on gas prices.
The impact of the bidding system is evident when the highest bid from gas-fired power plants is accepted to meet demand. This accepted bid becomes the "marginal price," which is then paid to all generators, even those with lower operating costs, such as wind farms and nuclear reactors. Consequently, the price of electricity is often dictated by the most expensive source of generation, resulting in higher costs for consumers.
To address the challenges posed by the bidding system and reduce the country's dependence on gas, the UK government has set targets to increase the use of renewable energy sources. By 2030, the goal is to have gas-fired power account for only 5% of the country's electricity generation. This shift towards renewable sources is expected to insulate consumers from volatile international gas prices and potentially lead to a more sustainable and cost-effective energy landscape in the UK.
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Supply and demand issues
The UK's electricity prices are influenced by a unique pricing system, where power generators state how much electricity they can provide every half hour, and the grid states how much is needed. If there is a gap, a bidding system allows companies to make up the shortfall, and the highest bid sets the market price for electricity. This means that the most expensive source of electricity generation, usually gas-fired power plants, determines the market price.
This "marginal pricing" system has led to high electricity prices, especially when coupled with rising gas prices. The UK's reliance on gas imports has been a significant factor in its high electricity costs. Russia's invasion of Ukraine in 2022 led to a global energy crisis, with gas prices tripling. The UK's limited gas reserves make it difficult to stockpile gas, further impacting prices.
The pricing system also affects renewable energy sources. When renewable sources like wind and solar power bid into the auction, they often have low prices due to their low variable costs. However, these low bids do not account for their upfront investment costs, which can deter new developers.
Additionally, the UK's infrastructure presents challenges. Being an island limits the ability to import cheaper electricity from continental Europe during periods of high demand or low renewable output. The lack of transmission capacity within the UK has also resulted in significant costs, which are passed on to consumers.
To address these issues, experts suggest interventions in the market design to prevent gas plants from solely determining prices. The UK government aims to reduce the reliance on gas-fired power, with a target of using it for only 5% of electricity by 2030. Increasing renewable energy projects and improving storage technologies can also help lower gas dependence and reduce costs.
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Environmental taxes and subsidies
Environmental taxes are levied on physical units that have a proven negative impact on the environment, such as motor and heating fuels. The UK's energy tax revenue in 2022 was comprised of taxes on electricity and gas (74.7%), transport (22.3%), and pollution and resources (3.0%). The largest energy tax is the hydrocarbon oil duty or fuel duty, which made up about 70% of energy taxes in 2022. The UK also implemented the Plastics Packaging Tax in 2022, which raised £207 million or 15% of pollution and resources taxes for that year.
The Climate Change Levy (CCL) is another environmental tax that applies to electricity generating stations with a capacity of 2MW or greater. The CCL provides incentives for the use of low-carbon technology in electricity production. Energy-intensive businesses that have entered into a climate change agreement with the Environment Agency may be eligible for a reduction in the main rates of CCL. Small generators, stand-by generators, and generating stations in Northern Ireland are exempt from paying the CPS rates of CCL.
The UK government has also introduced subsidies for renewable energy projects to reduce the country's reliance on gas, which is a major factor in the high cost of electricity. The more renewable energy projects that are implemented, the less expensive gas will be needed in the system, potentially lowering costs. The UK's energy regulator, Ofgem, plans to invest in storage technologies such as pumped hydropower projects to store renewable energy during abundant periods and use it when supplies are tight.
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The cost of infrastructure
Being an island nation also poses challenges for the UK in terms of infrastructure. Building interconnectors with continental Europe is costly and their capacity is limited, making it difficult to import cheaper electricity from other countries when demand is high or renewable output is low. Additionally, the UK lacks sufficient transmission capacity within its borders, leading to significant costs in upgrading and expanding the grid to accommodate increasing renewable energy sources. These costs are ultimately passed on to consumers.
The UK's electricity industry also holds daily auctions where generators bid on the price they are willing to generate electricity for. The highest bid needed to meet demand then becomes the price paid to all generators, even those with lower bids. This system further contributes to the high electricity prices in the UK.
To address these infrastructure-related costs, experts have suggested interventions in the market design to prevent gas plants from solely determining the market price. The UK government has set targets to reduce the reliance on gas-fired power and increase the use of renewable energy sources, recognizing that the more renewable energy projects are implemented, the less expensive gas will be needed in the system.
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Frequently asked questions
Electricity prices in the UK are largely determined by the price of gas, which has soared since Russia's invasion of Ukraine in 2022. Gas-fired power plants set the market price for electricity, resulting in higher costs for consumers.
The UK's electricity industry holds daily auctions where generators bid on the price they're willing to generate electricity for. The highest bid required to meet demand becomes the price for all generators, including those producing renewable energy. As gas-fired plants are often needed to meet demand, their higher costs set the price for electricity.
The UK's infrastructure presents challenges, such as limited transmission capacity and difficulty interconnecting with continental Europe. These issues increase costs, which are passed on to consumers. Additionally, energy policies and environmental taxes contribute to higher electricity rates.
The UK aims to reduce its reliance on gas-fired power and increase the use of renewable energy sources. By 2030, the goal is to use gas-fired power for only 5% of its electricity annually. Intervening in the market design to prevent gas plants from setting the price for the entire market is also crucial.
