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Shuffling costs cannot hide the increasing costs of renewables.

DAVID TURVER

Introduction

At the time of the election, the Labour Party was promising a £300 reduction in energy bills. In last Autumn’s budget they cut this pledge in half by claiming to be reducing energy bills by £150 from April (see Figure 1).

FIgure 1 - Starmer Promise to Reduce Electricity Bills by £150 from April 2026

Last week Ofgem released the price cap for the period 1 April to 30 June 2026. Energy bills have come down, by £117 for direct debit customers, quite a long way from the £150 promise. Time to look at what is going on under the covers.

Headline Changes to Energy Bills

The overall energy bill has indeed reduced £117 since the last price cap, coming down to £1,641 from £1,758. Gas bills are down £44 and electricity bills are down £73, all figures including VAT.

However, when Labour came to power in July 2024, the price cap for July-September 2024 was £1,568 so overall energy bills since Labour came to power are up £73, moving in the opposite direction to their original £300 reduction promise.

Wholesale Gas and Electricity Prices

Starting with some good news, Ofgem’s estimate of the wholesale cost of both gas and electricity has reduced significantly since the last price cap. Wholesale gas prices have fallen 12.4% to £24.82/MWh and wholesale electricity prices have fallen 5.8% to £76.60/MWh. The reduction in wholesale prices has led to a reduction of about £19 in direct fuel costs for electricity (excluding costs of CfDs) and ~£44 for gas, both figures quoted ex-VAT.

With gas prices at that level, we might expect wholesale electricity prices to be £50-55/MWh, with the difference being accounted for by carbon costs. The price of carbon has fluctuated wildly during Ofgem’s assessment period rising from ~£55/t in mid-November 2025 to over £70/t in mid-January 2026 before falling to ~£45/t in mid-February after Chancellor Merz of Germany said the EU Emissions Trading Scheme “should be revised or postponed if it undermines industrial competitiveness”. We might therefore hope that actual wholesale electricity prices might be slightly lower than Ofgem’s estimate.

Shuffling Costs from Bills to Tax

Much of the promised £150 reduction in bills was to come from abolishing the Energy Company Obligation (ECO) and moving some of the Renewables Obligation (RO) subsidies from energy bills into general taxation.

Of course the change to the RO scheme is not a real reduction in costs, just shuffling costs from energy bills to payslips. Nevertheless, the cost of RO bills has fallen ~£67 (ex-VAT) on the average electricity bill.

The ECO scheme forced energy suppliers to instal energy saving measures like insulation into homes. However, the Public Accounts Committee found the scheme to be an “abject failure” with 98% of external and 29% of internal wall insulation installations were defective. The ECO scheme has been removed from energy bills cutting about £24 from electricity bills and about £36 from gas bills. However, the Government has similar schemes in place such as the Warm Homes Plan, the Warm Homes Local Grant, the Warm Homes Social Housing Fund, the Great British Insulation Scheme and the Boiler Upgrade Scheme that are funded from general taxation. Again removing the ECO appears another sleight of hand with bill savings offset by other schemes funded by general taxation.

We now have a total of £184 (ex-VAT) or ~£193 including VAT of bill reductions, but the headline reduction is just £117 (VAT). Something else must have gone up.

Changes in Subsidies

In addition to the RO scheme, there are two other subsidy schemes: Contracts for Difference (CfDs) and Feed-in-Tariffs (FiTs).

CfD costs are hidden in the direct fuel cost element of electricity bills. Looking at the detail of Ofgem’s workbook we can see that CfD costs are up ~£6 per customer (ex-VAT) since last time. This reflects Ofgem’s predicted increase in the CfD scheme where they expect the cost to rise from their latest estimate of £2.8bn for 2025/26 to £3.3bn in 2026/27. It is worth noting that in February 2025, they expected CfDs to cost £2.3bn for 2025/26. Moreover, back in November, they expected the cost of CfDs to be £798m in the October-December 2025 quarter and the actual cost has come in at £900m. As wholesale prices fall, CfD subsidies rise so we do not see the full reduction in wholesale prices in our bills.

The cost of FiTs is included in Policy Costs and has gone up about £1.50 (ex-VAT) since last time.

Network Costs

Another big change to energy bills comes in the form of increases in Network Costs. Electricity network costs are up £26 since last time and gas network costs are up £40 (both ex-VAT).

Electricity network costs comprise three components: Transmission, Distribution and Balancing costs. The biggest cost element is the high voltage transmission network and this has gone up a staggering 65% to £81 (ex-VAT) per customer since the last price cap and has more than doubled since Labour came to power. Much of this increase can be attributed to the very high costs of building out the grid to connect remote offshore windfarms. The second part of electricity network costs is the lower voltage distribution network where the cost has fallen about £3.50 per customer since last time. Finally we have balancing costs, where the headline costs have fallen nearly £6 since last time. However, balancing costs vary seasonally, with higher costs from October to March than from April to September. If we compare balancing costs for April-June 2026 to the same period last year we can see underlying balancing costs are up about £5 (ex-VAT) per customer. This reflects the higher penetration of intermittent renewables on the grid and the greater costs of maintaining grid stability.

Other Costs

We should not overlook the impact on bills of several other components: the Capacity Market (CM), the Warm Homes Discount (WHD) and other costs like Nuclear Regulated Asset Base (nRAB).

The CM pays generators to be ready to provide backup to the grid, typically when wind and solar output are very low. The costs of the CM are typically buried in the wholesale cost element of the price cap. CM costs have surged over 77% in the latest price cap to nearly £43 per customer (ex-VAT). This reflects the increase in forecast CM costs we covered over the summer.

The WHD was expanded last year and most of the cost has been moved from the standing charge to the unit rate. The net result is that the cost of WHD and other policy costs have fallen about £7 in electricity bills. Other policy costs including the WHD and Green Gas Levy have added just over £1 to average gas bills.

There are other minor changes to operating costs, debt recovery and the allowance for supplier profits.

Summary and Conclusions

The changes to the price cap are summarised in Figure 2.

Figure 2 - Summary Changes to Price Cap Apr-Jun 2026

We can see that overall direct fuel costs have fallen £63 which is a real reduction in energy bills. This can be attributed to falling gas and carbon prices, neither of which Labour can claim credit for.

Shuffling costs from energy bills to general taxation has led to a headline reduction in bills of £127. However, this is not a real reduction because we now just pay those same costs through our tax bills instead of energy bills. The government also plans to return the ROC element of these costs back on to energy bills in April 2029.

There is a total increase of nearly £93 across CfD and FiT subsidies, network costs and the Capacity Market. These are real increases in the cost of energy, mostly driven the hidden costs of renewables, over and above the direct subsidies they receive.

The changes to other costs are relatively modest.

We can conclude that Labour’s original pledge to reduce energy bills by £300 was a lie. Moreover, their promise to cut energy bills by £150 in April was a con. The government have done nothing to address the underlying structural reasons for high energy bills. In fact, they have done quite the opposite because without shuffling ROC and ECO costs on to taxation, bills would have gone up even though fuel costs have fallen. They are trying to kid us with an elaborate shell game.

This article (Labour’s Energy Bill Shell Game) was created and published by David Turver and is republished here under “Fair Use”

See Related Article Below

Government Claims Cost of Electricity is Falling. It’s Not

Sky-high electricity bills are nothing to do with Ukraine

PAUL HOMEWOOD

The new energy price cap is announced. The BBC reports:

Typical household energy bills will fall by 7% in April, regulator Ofgem has announced, following a shake-up in charges by the Government.

Nearly everyone in England, Wales and Scotland will benefit from a cut irrespective of their tariff, although the amounts will vary between households.

For millions of households on variable tariffs governed by the price cap, the drop will be about £10 a month for those using a typical amount of gas and electricity.

However, prices are still about a third higher than before the war in Ukraine, debts have ballooned, and billpayers are being urged to shop around for further savings.

The 7% fall in the price cap is the biggest drop since last summer. While the Government promised a £150 a year reduction in April, the cost of running the energy network is up, leading to a lesser saving of £117 for a household using a typical amount of energy.

The BBC is being particularly dishonest when it says “prices are still about a third higher than before the war in Ukraine”. The clear intention is to portray the Ukraine war as still keeping gas prices elevated. The figures show this to be false.

Firstly, energy prices were extremely low in 2020-21 because the pandemic lockdowns reduced demand.

But if we go back to the first Ofgem price cap, January to March 2019, we see that gas prices have barely risen since in real terms:

Although domestic gas bills have increased from £523 a year to £766 under the new cap for April, nearly all of this explained by general inflation. However, electricity prices have risen 65.4% despite inflation (RPI) only rising by 43.7%.

Clearly gas prices cannot be the reason why electricity prices have far outstripped general inflation.

Electricity prices are high for one reason and one reason only – Net Zero policies. In fact the new cap understates the impact of Net Zero. The new cap takes £130 of renewable subsidies off electricity bills and instead puts the cost onto taxation, or more accurately, Government borrowing to be paid back by future generations.