Why are UK energy prices so high?

The United Kingdom has some of the highest electricity prices in Europe, which is also higher than other similarly developed countries. At the same time, the UK has moved faster than many comparable nations in reducing the CO2e emissions from electrical generation, being the 1st G7 country to stop burning coal in 2024*. (A major achievement considering that over 60% of UK energy in the 80’s – early 90’s was from coal).

(*France & Canada have lower average CO2 emission per kWh, due to Nuclear & Hydropower. Several nearby none G7 countries, like Sweden, Finland, Norway, and Iceland have never used significant, if any coal for electricity production)

In recent years this coal generation has been replaced by renewable energy, specifically offshore wind (~30% in 2024), but also Solar (~10% in 2024)

Did renewables cause prices to rise?

This has led to a question If renewables are the cheapest form for electrical generation, then why are the prices in the UK so high?

The simplest answer is the cost of Natural Gas that has increased in Europe, especially since the Russian invasion of Ukraine, but it’s much more complex

The price you pay for electricity is influenced by three main components:

1. Generation Costs: The cost of producing electricity, which varies depending on the source (renewables, gas, etc.).

2. Transmission and Distribution Costs: The expenses involved in delivering electricity from power plants to homes and businesses nationwide.

3. Utility Overhead and Profits: The costs associated with running the utilities, including administrative expenses and profits.

Most utilities set prices based on average costs, aiming to balance these factors. When they misjudge—such as during gas price spikes—some utilities struggle to stay profitable or even go out of business. Electricity, unlike some commodities, cannot be easily stored in large quantities. Therefore, supply and demand must be balanced in real-time, which adds complexity to the pricing system.

?The wholesale price of electricity varies every 15 minutes and will fluctuate largely based on supply and demand. When there are excess renewables like wind (often at night) the wholesale price will drop and occasionally will become negative, but when demand exceeds the lower cost sources the price will rise.

An important aspect of the wholesale market is that the price is set by the most expensive unit of power needed to meet demand. This means that even if 90% of electricity comes from cheaper renewables if the last 10% is from gas, the entire market price is determined by the cost of gas. As a result, fluctuations in gas prices can drive up electricity costs across the board, even when renewables are covering the majority of demand.

Currently, the UK operates under a single national wholesale price for electricity, meaning that every region pays the same rate. However, the transmission network has capacity limitations. For example, Scotland often produces surplus wind energy, but during peak demand periods, transmission bottlenecks prevent it from being transmitted to high-demand areas like London. In these cases, expensive gas-fired plants in the South have to be activated, and wind power is curtailed.

Solutions to Lower UK Electricity Prices

So what can be done to lower electricity prices in the UK?

1. Build More High-Voltage Transmission Capacity: Increasing transmission infrastructure, particularly from Scotland to the Southeast, would reduce congestion and allow more low-cost renewable energy to reach demand centers. This would decrease the reliance on expensive gas-fired plants during peak times.

2. Develop More Energy Storage Near Demand Centers: Energy storage solutions, such as batteries or pumped hydro, can help balance supply and demand. By storing energy during times of low demand and releasing it during peak periods, storage can smooth out price spikes and reduce the need for costly gas peaker plants.

3. Introduce Regional Price Markets: Moving from a single national price to multiple regional markets would allow areas with abundant low-cost energy (e.g., Scotland) to benefit from lower prices. This could also encourage industries to relocate to regions with cheaper power, reducing the strain on high-demand areas like London.

4. Build More Renewables Closer to Demand: Increasing the number of renewable energy projects near high-demand areas would lower transmission costs and reduce congestion. This requires policy changes, such as the recent government lifting restrictions on onshore wind projects, which had effectively been banned in the UK

5. As an individual you can select an electric utility that offers a time of use or wholesale price tracking tariff and shift your demand to times of lower rates. Flexible loads like using a heat pump water heater, charging an EV, or installing a home battery can allow you to maximize these benefits. Home solar is another option if you can install it on your home that will make a long-term positive impact on your energy costs.

6. Improve efficiency – especially with home heating. Improving insulation, and installing a heat pump heating system can make major impacts, and controlling air exchanges can have a major impact. The Everything Electric show had a recent episode on the improvements made to 1 end terrace Victorian home which showed a 75% reduction in electricity use.

While the cost of electricity in the UK is painful the government is in the process of implementing policies that should help with costs, although these are taking a long time to come to fruition. Some of these needed changes are seeing local opposition like the proposed HV lines from South Wales to England

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