The price of energy and the system costs of renewables
PROFESSOR SIR DIETER HELM
Why is the price of electricity so high? It’s a puzzle, because successive politicians (Blair, Cameron, May, Johnson and now Starmer and Miliband) and lots of lobbyists have told us we should have expected quite the opposite: cheap energy, to be achieved by getting out of fossil fuels. First exit coal, then bear down on gas, and a new era of cheap wind and solar would give the UK low absolute and relative electricity prices. It would not quite be “too cheap to measure”, as civil nuclear was once expected to be, but cheap enough to make the UK a “clean-energy powerhouse”, where the energy-intensive industries of the world would be flocking to in order to gain this great competitive advantage. Sadly, miracles probably don’t happen, and it is wise to be wary of politicians promising them.
So far, it has turned out very differently. The UK has amongst the highest industrial energy prices in the developed world, and far from energy-intensive industries flocking to the UK, they are leaving. Gone is the fertiliser industry, almost gone are petrochemicals, steel and aluminium, and the car industry is back to its output of the 1950s.
Domestic electricity prices are not cheap either. On the contrary, they rank amongst the highest too.
How has it come to this? How have we ended up in a political scrap between Starmer and Miliband on the one side, and the Conservatives on the other, and Reform too. How, in the process, has the latest political consensus around the Climate Change Act 2008 and the 2030 and even 2050 net zero targets so rapidly broken down?
There are several strands of the argument that are glossed over. Price is not the same thing as cost. Cost is not some simple thing to measure. The short term and the long term matter. Transitions are not the same as equilibria. What tends to happen is that the measures of cost that are reached are those that confirm pre-existing political and lobbyists’ interests. Never, it might be said, let the inconvenience of an appropriate way of measuring the cost of energy get in the way of a pre-set paradigm.
Price versus costs
In a competitive market, price is determined by demand and supply, not just supply. What something costs does not equate to what people are willing to pay for it, in the presence of competitors. Only a monopoly can force its customers to pay whatever its product or service costs. But they are not compelled to buy the products made from electricity in the UK if these can be produced more cheaply abroad, and companies have the choice of producing elsewhere if the transport costs of their final (or intermediate) products are less than the cost differentials.
This economic reality is one reason why the UK has been de-industrialising in the face of high energy prices. It also explains why territorial carbon production emissions in the UK have fallen without having a 1-to-1 impact on climate change. Switching to imports does not mitigate climate change, and getting to net zero territorial emissions will not necessarily have even a positive impact on global warming.
In response, it is argued that carbon leakage (firms based in the UK closing down UK production) has not been quite the problem it is claimed. This is disingenuous; it is not so much that firms are leaving, but rather that energy-intensive industries are not coming to invest in the UK. This is a pattern reflected across Europe. Energy-intensive industries prefer the US, China, India and the Far East.
The upshot is that, if the UK really wants to stop causing climate change (a claim that the Climate Change Commission erroneously made about its advocacy of a 100% net zero target in its advice on the 2019 Climate Change Act Amendment), then the target should be carbon consumption not carbon production. It cannot be repeated too often that climate change is global, and it does not matter where the emissions take place. Making the steel in China rather than in the UK does not reduce global emissions. In practice, it probably increases net emissions above what they otherwise would have been.
Expensive energy reduces competitiveness and worsens the already dire state of the current account of the balance of payments. It makes UK citizens poorer, as well as more reliant on external supply chains, not least steel for defence purposes.
High prices affect consumers by reducing the affordability of energy. This is the other dimension of basing price on cost, where costs are high. The industrial sector should, in a competitive market, face prices that match those faced by competitors, and consumers can pay only prices that they can afford. Otherwise, the government has to step in to subsidise them, either directly from tax or indirectly from better-off customers who pay higher prices to fund direct subsidies. So it turned out, with the government effectively paying a significant proportion of domestic energy bills on behalf of customers in 2020/21, and with OFGEM now advocating “progressive pricing”. These are distributional policies and all about the politics of equality, not the economics of cost.
Notwithstanding the uncompetitiveness of energy prices in the UK, the costs don’t go away; they have to be paid for. The government argues that the higher costs are strictly temporary, caused by “high and volatile” gas prices, and that, by moving more and more towards solar and wind, we get off the cost escalator and enter the land of milk, honey and cheap electricity. Energy costs are only temporarily high, they won’t be for much longer, causing the promised £300 reduction in customer bills by 2030.
There are two parts to this argument: that gas is the cause of higher prices; and that renewables are cheap. Both are simplistic, and need to be teased apart.
Is gas the cause of our sorrows?
The convenient narrative is that it was the gas price shock following the invasion of Ukraine by Russia that caused the price spike in electricity. This assumes that the price of electricity was competitive before the gas prices rose, which it was not. There had been repeated concerns (and occasional panics) about high electricity costs throughout the 2010s, serious enough for Miliband, as the then Leader of the Opposition in the run-up to the 2015 election, and Cameron afterwards, to support explicit price caps on domestic electricity prices.
The gas price started to rise well before the Russian invasion of Ukraine, as the numerous impacts of the pandemic lockdowns unwound and as world transport and world trade began to normalise. Putting this aside, the blowing up of the Nord Stream pipelines, and the sharp reduction on Russian gas coming into the European market, obviously had a big effect, and one that would take until late 2024 to start to fully unwind. By mid-2025, the European gas price is back at or below its five- and ten-year averages in real terms. It was a classic short-term shock, reminiscent of the oil price shock in 1990 caused by the first Gulf War and, as then, one mistaken for a long-term trend.
Why did the gas prices impact so hard in the UK? This is a puzzle, given that the UK has North Sea production still (although it is being killed off by the government’s policy on licences and the windfall tax impacts). It imports only around 4% of its gas from Russia. The answer is that its prices are linked to Europe, not least by interconnectors in both gas and electricity. It is not – as Miliband claims – that we are pure global price-takers, but we are European ones. With the reduced supplies from Russia, Europe turned to global LNG (liquefied natural gas), and the UK was a partial conduit.
Gas prices go up, gas prices go down, and the wholesale electricity price in the UK follows. Contrary to Miliband (and Kwarteng), gas prices do not always go up; they can also go down. Getting out of reliance on what it believed to be high and volatile gas prices might actually mean also getting out of low and falling gas prices too, a point Miliband does not make. More and more renewables based upon contracts for differences (CfDs) mean that they will determine more and more of the cost of electricity, and if gas prices carry on going down, there is less and less benefit to the UK.
Next question: why are electricity prices in the UK higher than those in Europe if the gas price in Europe feeds through to the UK? The answer goes to the heart of the UK’s energy policy. The UK got out of coal, ahead of everyone else. Germany got out of nuclear, but it built new coal power stations. Across Europe, coal took the strain and limited the impact of the gas price spike on electricity generation. It did not in the UK. From an environmental (and air quality) perspective, the UK did the “right thing”: gas is less carbon-polluting than coal, so, from a carbon perspective, it is better to burn gas.
The impact on prices was felt because the UK not only got out of coal, but also most of its nuclear capacity too. It may be building new nuclear, but it is on course to close everything else except Sizewell B by the end of this decade, and Hinkley may not come on stream until after 2030. The result is that when the wind doesn’t blow and the sun doesn’t shine enough to meet total demand for electricity, gas sets the price. That is most of the time, as there isn’t much else. The UK deliberately rendered its electricity system super-exposed to the spot price of gas. That exposure is all the greater because it was a deliberate policy in the late 1990s after privatisation to break the long-term gas contracts that would have smoothed the variations in gas prices, and instead to go for short-term spot contracting, chasing the ever-cheaper gas down in that period of low and falling gas prices.
Matters made the UK even more exposed to short-term gas prices because it invested in virtually no storage. In the glory days of the North Sea, this did not matter. The take from the wells could be varied as needed: the gas wells were the storage. Now there is nothing much left, except Rough and that is threatened with imminent closure. The UK’s balance of supplies comes from Norway’s single pipeline (30% of the UK’s gas) and from LNG.
Are renewables cheap?
The argument is that exposure to gas prices is a temporary affair. Why? Because, it is argued, soon the renewables will be supplying most of our electricity, and they are “cheap”. It is utopia postponed, but not cancelled. Go faster, build more wind and solar, and the UK’s cheap global clean-energy superpower competitive advantage lies just around the corner.
It is here that the confusions about the concept of “cost” come into their own. The most simplistic argument is to point out that the marginal costs of wind and solar are close to zero. This is indeed the case, and in many respects it is uninteresting. Comparing the marginal cost of gas with wind and solar is comparing apples with oranges. Wind and solar are intermittent; gas supplies both firm and flexible power.
In the “Cost of Energy Review”,[1] I set out how to ensure that the system could deliver the required firm power capacity through equivalent firm power (EFP) auctions. The renewables industry (and the Department for Energy Security and Net Zero, DESNZ) went into a frenzy of lobbying against this idea. Why? Because it goes to the heart of the problem: a unit of solar or wind power is not of equivalent value to a unit of gas (or nuclear). Although the lobbyists keep trotting out that each new wind farm is enough to power x number of homes, they never put in the press releases “when the wind blows”. Even the Financial Times repeats these misleading press statements without exception.
Solar and wind are intermittent, low-density, geographically distributed generating technologies. No modern economy could rely solely upon them. There has to be back-up. This back-up is an additional cost of renewables, and it would be reflected in the discounted EFP prices that renewables would achieve. No wonder the lobbyists for renewables hate the concept. To be clear, renewables don’t pay the costs of the intermittency they cause to the system; they don’t pay for the additional capacity needed to meet an expected peak demand; they don’t pay for the extra transmission and distribution networks required; and there need to be lots of wind turbines and lots of solar panels to replicate the power output (when the wind is blowing and the sun shining) of a gas turbine.
Worse still, the demand for security of supply is rising, as the new communications and digital technologies gain ground. A data centre, a cyber link, and almost all the infrastructures that rely upon firm power are 24/7. The events in Spain and Portugal in the Iberian Peninsula-wide power cut show how the value of security of supply has increased. The new infrastructures are highly energy-intensive.
These require not only back-up at scale in order to overcome longer winter periods of low wind, dark skies and cold, but also lots of short-term back-up too, like standby diesel and gas generation. This standby capacity needs to be added to the system requirements which are moving towards twice the capacity demand of the pre-renewables world. This is as much as 60GW of extra capacity on top of what is already required for the same output. The total cost of all this is obviously considerable, and these are all costs of deploying renewables at scale.
Transmission has been built up to take power from very large coal, nuclear and gas power stations to the centres of demand – from the coalfields, the coastal nuclear stations and remoter gas power stations to London and the South East. Now the transmission system is being required to take small-scale generation from offshore and from the north and east of Scotland to the South and from the east coast of England. In the offshore Scottish case, the CfD price is already around £113/MWh, before adding on the transmission costs and the intermittency costs (and paying for constrained-off power).
Far from being the case that energy-intensive industries would be flocking to locate in North East Scotland to get close to cheap offshore wind generation, a better argument would be not to generate there at all and then avoid all the extra transmission costs. Zonal pricing will not solve this problem: the advocates of zonal pricing for Scotland also fail to take account of the costs of balancing the Scottish system, notably in winter. The UK managed without the extra transmission to and from Scotland for decades using a system with much less installed capacity and where industrial demand for electricity was still significant.
The system costs of renewables should therefore include not only the additional 60GW of capacity for the same output, but also all the extra transmission costs again for the same output. These are not marginal costs, they are system costs.
Intermittency
There are all sorts of ways of ameliorating some of the impacts of intermittency. First, smart technologies allow for the possibility of active demand – what might be called “voluntary power cuts”. People can be paid to switch off. It remains to be seen how willing in a digital age people actually are to organise their lives around pre-downloading programmes, etc, for their evening’s entertainment. Even if they are, there has to be widespread smart metering – and smart meters that actually work. Not only is the UK rollout of smart metering a massive policy failure (placed in supply not distribution, as it is in most other countries, and with multiple technologies and a record of widespread failures), but it remains incomplete. Great new technological ideas for active houses fall down when the basics are not in place. These tend to be treated as temporary, but typically are not, and in the meantime other ways of managing intermittency have to take the strain.
Second, batteries are as yet a short-term solution to the multi-time dimensional problem. They have long supply chains and lots of carbon and other environmental costs in their manufacturing and installation which need to be included in a proper assessment of their costs and their carbon footprint (disguised by importing the batteries and their components even when assembled in the UK and hence having the emissions excluded from the UK’s territorial carbon net zero target). The supply chains start with large-scale mining, and then refining (mainly in China), and then fabrication and then transport over long-distance, geopolitically exposed supply chains.
Batteries get better, as almost all technology does, but they don’t come free. Their costs (and their carbon footprints) should be added to the costs of renewables. There are no short-term storage costs for gas because it is not intermittent.
Third, there is so-called “long-duration” storage. These are the assets that can cope with longer periods of low wind/low solar. In the tropics, low sun is less of a problem than in a UK winter. More wind farms, geographically dispersed, reduce the risk of no available wind. But none of this is enough for a 24/7 digital economy, with its data centres, fibre-dependency, and now also air conditioning.
Step forward hydro, including pumped hydro. Water is stored energy which gravity can release. It can generate when the wind doesn’t blow and the sun doesn’t shine. But it is not like gas; it tends to be seasonal. Water released in summer can’t be re-released unless it is pumped uphill, and that has costs. Again, renewables have longer-term storage costs, whilst gas does not.
Fourth, there is long-distance transmission, bringing power from sunnier areas, and from other weather systems to balance out wind flows. These could be very long-distance, for example from North Africa. They could also be long-distance geothermal, for example from Iceland. In contrast, gas requires pipelines now that the UK is no longer going to be allowed to exploit its own North Sea resources (and instead use Norway’s) and has ruled out fracking.
All of these complement gas as a means of handling intermittency, but none adds up to a comprehensive solution. They might one day, but not yet. Building lots of intermittent generation first, before the infrastructure and back-up are in place, means higher costs until all the problems are resolved.
In the meantime, the cost of renewables is not competitive against the cost of gas, even before the costs of additional capacity, the costs of transmission and distribution, and the costs of active demand, batteries and other forms of storage are added. These are all part of the system costs of renewables.
The best way to see this is to ask whether anyone would invest in a renewables project at scale on a merchant basis. Imagine there were no state-backed CfDs. Imagine that any merchant generators had to pay for the back-up power, and the connection and use of the distribution and transmission systems. Who would buy the power output? Not anyone who wants firm power. They will at best pay for EFP, with the renewables absorbing the costs of back-up. Investing in solar panels and a battery might make sense at the point of consumption, but not in remote offshore Scotland on a merchant basis. If renewables were “nine times cheaper”, as Miliband would have it, there would be no need for subsidy. But, in fact, renewables need subsidies to be economically viable. No wonder the renewables lobby were so opposed to EFP.
The above should not be contentious, but it is. Yet it is not the end of the argument. There is a series of further considerations that complicate the picture.
Will solar ever get cheaper?
Some see solar as the answer to climate change and energy prices. Solar, it is argued, is getting ever cheaper and will soon be “cheap as chips”, if it is not already so. The argument is around so-called “S curves”, which are reported empirically for a series of technologies. The pace of cost reductions just keeps getting faster and faster, so that Moore’s Law for computing is generalised to solar.
Like all such empirical claims extrapolated into the future, it might be true. But there are two caveats. First it might not; and second the cost of a solar module is not the same as the cost of the solar additions to the system in which it is embedded. This cost may actually rise as the amount of solar in total capacity rises. The cost of solar is not entirely about the cost of a solar panel; it is about the system costs of the intermittency and transmission and distribution. These vary by geography. The UK is not blessed with the same amount of sunshine as Spain and nothing like the sunshine of North Africa. (On the other hand, the UK has some of the best locations for offshore wind.)
Winter the further north you travel gets colder and darker. There is not much sun in December and January at northern latitudes. This is not necessarily a constraint if very long-distance transmission brings solar from south to north.
Even if the cost of transmission is high, the solar may well be cost-competitive in southern latitudes, so perhaps industry and people could move to North Africa to get access to ever-cheaper solar? This would replicate the growth of the British and German industries in the nineteenth century around coal fields. Perhaps the solar could be so cheap and abundant to overcome the constraints of heat and dryness – with solar desalination plus solar air conditioning making up for the impacts of climate change on these sunny locations.
This last point is the radical one. Given its geography, perhaps the UK should give up on becoming a cheap, clean-energy superpower. Perhaps stuff should be made in sunnier places? But then how would the UK pay for this, when it cannot pay its way now without a large balance of payments current-account deficit and an internal deficit? It would have the merit of making it easier to meet the net zero territorial target by hollowing out production further, but this is not what the UK government means when it obsesses about GDP growth. It is also not what a serious commitment to defence would entail, as it would further weaken the domestic military supply base. And the UK would then be giving up on its ambition to be a “cheap” and “clean” energy superpower.
Does the price of electricity have to follow the wholesale cost?
Perhaps we could get out of using the gas price to set the electricity price through the wholesale market? As the system moves to more and more zero-marginal-cost generation, setting the price on the basis of marginal gas drives a very big gap between the cost of the fixed and sunk capacity (the solar panel, the wind turbine and the transmission lines) and the variable-cost fuel. The price of electricity could be set on the basis of system capacity costs, not gas prices, with gas as a reserve regulatory asset base (RAB).
Long before a complete renewables plus nuclear system arrives, the wholesale market is in danger of going haywire: there will be frequent times when there is much more capacity generating than there is demand. It may be that in due course demand may follow a similar path, ramping up as the wind blows and sun shines and ramping down when they don’t. When zero-marginal-cost capacity exceeds total demand, the wholesale price drops to zero. There is no positive-marginal-cost generation required. It may go negative: if a renewables generator is paid a fixed price for its output (a CfD) and if (and it’s a big if) it has to actually generate to get paid this fixed amount, it is worth it bidding negative prices down to a value so low as to be just below its positive CFD price. If the CfD is worth £70/MWh, and to receive this, the renewables generator must generate, then a negative bid of £69/MWh makes economic sense.
It is not hard to see that such a pricing system breaks down. And it is not hard to see how difficult it will be to justify to the public a state-backed fixed-price contract being paid when the generation is not used and useful. Yet this is already what is happening. There are very large curtailment costs already. The consumers are already paying for lots of electricity that they don’t use. That, too, is a cost of renewables.
In the “Cost of Energy Review”, the case is made for switching from an energy to a capacity market, using the EFP model. The required capacity to meet the expected peak demand plus a safety margin is auctioned. The system operator could hold a gas reserve available. Since most of the time this reserve will not be used, it will be all but impossible to earn a sufficient return on its total costs from the rare times it is called upon to generate. The National Energy System Operator (NESO) estimates that 35GW of gas capacity will be needed in 2030, which it expects to operate only 5% of the time. It would need lottery-style prices for the brief moments it is needed to pay for having this capacity in readiness all the time and to pay for short-term gas supplies on call.
Instead, the strategic gas reserve could buy up the existing gas power stations and place them in a RAB-based new gas reserve utility. The RAB would be backed by debt (to pay for the acquisitions) and the costs of the RAB plus the operation and maintenance plus the actual gas used could be charged to the use-of-system charge across all customers who benefit from the security of supply it provides as a public good to the system. Alternatively, the intermittency generators could contract directly with gas to provide back-up so that they can bid firmer or even firm power in the EFP auctions. The intermittent generators could also contract with other long-duration storage and allow the market to determine its full price.
A strategic gas utility is a sensible way forward and could be done now. But there is a catch to all these options. The amount of money needed to be raised to pay out all the investors’ costs in the renewables and the nuclear and the gas and the batteries and extra transmission and distribution capacity does not change much. At present, gas prices add to the total revenues of the various players – some more than others. Where will the replacement revenues come from? If the renewables are nine times cheaper and if electricity prices are to fall as promised for industry and domestic customers, then the total revenues must fall, pari passu. Unless there are super-normal profits now, someone will lose out.
The 30-30 rule and the extra costs of reality
Economic models of different electricity generating technologies rarely take much account of all the practical dimensions of their applications to existing systems. In practice, an assumption is made that all goes to plan, that model costs turn out to be the correct estimate of actual costs.
Sadly, the record for project delivery for major infrastructure is asymmetric. On average, the rough rule of thumb is around 30% over budget and about 30% delayed – the “30-30 rule of thumb”. In the UK energy sector, the smart meter programme is vastly worse. Similarly, energy efficiency rarely delivers the net present values its advocates propose. For the renewables and the associated grid infrastructure, the models fail to take into account that the UK is not alone in pursuing a fast-track decarbonisation policy. The costs of transformers and wind turbines rise as a result. It is not just the cost of the mainly imported components that goes up, but so too does the cost of skilled labour.
To these can be added two other considerations: the exchange rate and the cost of capital. The UK has high inflation relative to its EU trading partners, and it runs a 1–2% premium on interest rates to hold the exchange rate. Currently, the UK has a 4% nominal interest rate, compared to 2% for the European Central Bank and nearly 4% inflation versus 2% in the EU. Even this interest rate premium is not enough to stop a slipping exchange rate. Both the cost of labour and the cost of capital are crucial to the outturn cost of, and delivery timing for, the big renewables projects in the UK.
More generally, the costs of construction in the UK are remarkably high. Think of the cost of HS2 before much of it was scrapped at around £100 billion. Even the sharply reduced HS2 link to Birmingham from outside London is to cost more than £0.5 billion per mile. Heathrow’s third runway might cost £60 billion. Hinkley will probably cost over £40 billion and some estimates put Sizewell even higher. Even completing the replacement of a single bridge out of Oxford railway station is taking three years.
There are many reasons why construction costs are so high in the UK. The skills training is lacklustre and apprenticeship programmes have slipped back. Competitive tendering often opts for the lowest tender price and disregards elements of skills and technological investment. Then there are lots of competing infrastructure and buildings programmes, such as housebuilding, and the water and sewerage systems.
Broader government policies exacerbate these costs. The sharp increase in the cost of labour, plus the increase in the cost of capital caused by unfunded public expenditure, and then the taxes on savings in the 2024 Autumn Budget are all strongly negative. Meanwhile, the welfare system encourages several million working-age people to opt out, reducing the pool of labour supply further out.
These are but examples. Some projects go well. But it is hard to conclude that the sorts of forecasts that have gone into the costs of the net zero target for 2030 are realistic. Adding the 30-30 rule of thumb above opens up a yet further cost differential for the renewables.
One further consideration in this regard is worth drawing attention to. The roll-out of a fast expansion of offshore wind requires coordination with the roll-out of the grid connections, and that requires that the planning, procurement and building of new transmission lines do not slip back. Here the 30-30 rule looks of great concern. Even if the wind farms are built on time, the grid might not be. The result is the costs of lots of redundant generation whilst the grid catches up with the wind farms – unless, of course, the wind farms themselves are delayed or even scrapped in some cases. Imagine the curtailment costs of all that unusable wind generation.
Conclusion
It is hard to conclude other than that the Secretary of State is deluded when he champions the 2030 net zero target as a route to lower costs of energy through ever-cheaper renewables. Rather, it reflects a conclusion seeking a cost measure that confirms it.
The correct measure is system costs. The reality is that net zero by 2030 is expensive and that by dashing flat-out towards it, the result will be even higher costs. That points to an even more challenging reality: it is going to be expensive to decarbonise carbon consumption, and it is a delusion to think that having for so long not been paying the cost of the pollution our consumption is causing, by now paying for pollution, it is going to be all win–win. The price is not coming down, as heralded by the Secretary of State. It is going up, with a system requiring twice the generating capacity and much more transmission, lots of batteries and storage, and a great deal of back-up generation to keep the lights on, all to achieve the same amount of electricity. To think otherwise is to commit the broken windows fallacy – that by breaking windows, economic growth is increased. Replacing one set of windows with another is a net cost, and replacing the windows with more glass than was previously needed is a bigger cost still.
It is time to be honest about the costs of the net zero target.
[1] Helm, D.H. (2017), ‘Cost of Energy Review’.
This article (The price of energy and the system costs of renewables) was created and published by Professor Sir Dieter Helm and is republished here under “Fair Use”
See Related Article Below
Energy Bills Moron Premium
Even though gas and electricity prices are down, the energy price cap has gone up.
DAVID TURVER
Introduction
Yesterday, Ofgem announced the new energy price cap covering the period from October to December 2025. Overall, the levelised price cap has gone up £35 from £1,720 to £1,755 for dual fuel households paying by direct debit.
Energy Minister Michael Shanks blamed the rise in bills on the “fossil fuel penalty being paid by families, businesses and our economy.” However, close examination of the detailed Ofgem annexes shows that the prices Ofgem assumed for both gas and electricity were lower than last time, yet the price cap went up. Another minister stood by Labour’s promise to reduce energy bills by £300 by 2030.
Ed Miliband even claimed that “wholesale gas prices remain 75% above their levels before Russia invaded Ukraine” as a reason for high prices. But even a cursory glance at the chart of UK gas prices shows they are well below the prices set in the whole of 2022 and Russia invaded Ukraine in February of that year.
Figure 1 – UK Gas Prices 5-year chart (p per therm)
In fact current gas prices are lower than most of 2021 and much of 2023 too. If ministers cannot even properly diagnose the problem, then they have no hope of solving it so just like with the interest rate on the national debt, we will continue paying a moron premium on our energy bills until sensible people are back in charge. Let us dig into the detail of the new price cap to find out what is really going on.
Oct-Dec 2025 Price Cap Change in Electricity Bills
The different components of electricity bills and how they have been treated in these calculations are explained in the Appendix at the end of the article. We can examine which parts of our electricity bill have changed most since last time and since October 2018. All data from Ofgem Annexes 2, 4 and 9 using Tab 1c, where the figures are for constant consumption of 2,700kWh per year.
The wholesale cost of electricity has fallen from £84.66/MWh in the last price cap to £83.32/MWh this time (including about £25/MWh carbon tax). Gas prices have also fallen from £32.98/MWh to £31.37/MWh. It is therefore somewhat surprising to see that the price cap for electricity has gone up £25 from £882 (inc. VAT) last time to £907 this time. The main driver of the increase is increased network costs, driven by increased grid balancing costs, effectively higher costs from switching off windfarms when they want to produce more than we need or the grid can handle. A more generous Warm Homes discount and increased CfD subsidy costs also pushed our bills up. Electricity bills are also up £26.53 since the April-June 2024 price cap, the last period before Labour came to power, so the promised £300 reduction is nowhere to be seen.
Zooming out to a longer time fame we can see the how the various categories of cost have changed since October 2018-March 2019, the period of the first price cap (Figure 1).
Figure 2 – Change in Electricity Bills October 2018 to October 2025 (£)
Overall electricity bills have gone up by £360 from £504 (ex-VAT) VAT in October 2018 to £864 in the latest price cap.
After stripping out carbon taxes, direct fuel costs are up £71 since 2018 but are down just over a £1 since the last price cap. Direct fuel costs, excluding carbon taxes now make up only 23% of electricity bills.
The biggest increase since 2018 is in renewables and Net Zero related items that have gone up by £213. Of this, Network costs are up £97, subsidies are up £57, split into a £30 increase for Renewables Obligations, Contracts for Difference £22 and Feed-in-Tariffs £5. Carbon taxes are up over £30 and now cost about £67, the Capacity Market cost has increased by £14 and the Energy Company Obligation has increased by £15.
Other Costs are up £76 since 2018, with the bulk of the change being an increase supplier operating costs, an allowance for bad debt and the Warm Homes Discount. The increase in allowable margin has also added cost to bills.
Overall, some 59% of the increase in electricity bills can be attributed to Net Zero related items, with 20% to increased fuel costs and the remaining 21% to other items.
Oct-Dec 2025 Price Cap Change in Gas Bills
Gas bills are up £10 since last time despite a £15 fall in the direct fuel costs. The main drivers of the increase are a £9 increase in policy costs, reflecting an increase in the Warm Homes Discount and a further £9 increase in network costs. Operating costs are also up slightly as are debt recovery costs, partly balanced by tiny decreases in other minor components.
Conclusions
We can see that the direct and indirect cost of Net Zero policies and renewables have been the main driver of increased electricity bills since 2018. The more recent increase is also driven by Net Zero, mostly because of the increased grid balancing costs. Arguably the more generous Warm Homes Discount is also a result of high prices driven by the increase in Net Zero driven costs since 2018.
Sadly, we can expect bills to keep on rising, because of the massive spending on Miliband’s Clean Power 2030 plan, where he wants to spend £260-290bn by 2030. As we shall see in a forthcoming article, they are on track to overspend this budget and will save at most £4.5bn/year in gas used for electricity. Yet ministers still claim that our bills will fall (surely they know that we know they are lying by now). Only an idiot would expect bills to go down with this level of spending. Sadly, we can expect the moron premium to get bigger until we get someone sensible in charge of energy policy.
This article (Energy Bills Moron Premium) was created and published by David Turver and is republished here under “Fair Use”
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The Liberty Beacon Project is now expanding at a near exponential rate, and for this we are grateful and excited! But we must also be practical. For 7 years we have not asked for any donations, and have built this project with our own funds as we grew. We are now experiencing ever increasing growing pains due to the large number of websites and projects we represent. So we have just installed donation buttons on our websites and ask that you consider this when you visit them. Nothing is too small. We thank you for all your support and your considerations … (TLB)
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Disclaimer: TLB websites contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, health, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.
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Disclaimer: The information and opinions shared are for informational purposes only including, but not limited to, text, graphics, images and other material are not intended as medical advice or instruction. Nothing mentioned is intended to be a substitute for professional medical advice, diagnosis or treatment.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Liberty Beacon Project.
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