Energy prices for consumers across the UK rose again this month.
Ofgem, the energy regulator, set the maximum annual rate for an average household for gas and electricity at £1,755 until the end of the year.
The cap is now over £600 higher than when it was first introduced in 2019.
Under the cap, the average price of gas is significantly cheaper than electricity at 6.3p per kilowatt hour (p/kWh) compared to 25.7p/kWh.
New data on Tuesday also showed that the industrial electricity price paid for UK industry was the highest in the developed world. It was 63 per cent higher than France and 27 per cent higher than Germany.
Manufacturing output has been on a downward spiral for months, with the cement and metals industries claiming that the UK is relying more on imports.
British Steel’s operations were taken over by the government after blast furnaces in Scunthorpe were nearly turned off due to soaring energy prices.
With leading industry bodies calling for the government to reduce energy costs on firms via emphatic tax reform – and Labour’s opponents at Reform and the Conservatives calling for a radical change to the entire energy system – there may be no more draining issue facing Keir Starmer at this time.
What do political parties say?
Before coming to power, Labour pledged to accelerate the net zero transition. One of its central missions is still to “make Britain a clean energy superpower” and take greater control of volatile energy prices.
It wants at least 95 per cent of electricity generation to come from clean power by 2030.
The manifesto stated that it would establish a new state-owned company to invest in clean power, deploy dozens of mini nuclear power stations, ban new licences for oil exploration in the North Sea, permanently prohibit fracking, and subsidise insulation, solar panels, heat pumps, wind power, and other net-zero technologies.
Labour has argued its dash for net zero will reduce energy costs in the long term as the UK becomes less reliant on international gas prices, but opponents believe the government should expand drilling in the UK to keep electricity bills down in the short term.
The development of nuclear power stations has been praised as expanding supply, but plants at Sizewell C and other mini sites will take years before they begin to generate electricity and cost tens of billions of pounds to build.
Meanwhile, Kemi Badenoch has taken a harder line on energy policy, pledging to scrap legally binding net-zero targets and instead focus on lowering energy bills.
She also pledged to “maximise” oil and gas extraction, claiming that net zero measures are to blame for high energy bills
On the more radical end, Reform UK leader Nigel Farage said last month that he would scrap Labour’s “harmful, wasteful” net zero policies. Reform has also suggested taxing renewable energy and scrapping net zero targets.
Amid calls for “energy abundance” to boost growth in the UK economy and criticisms of Labour’s net zero policies, high energy bills is now one of the most urgent problems hindering the government’s growth mission.
How are energy prices set?
A mix of volatile prices in international gas markets, energy costs and other taxes – including to fund the drive to net zero – are keeping energy prices high.
Researchers and critics have also debated the extent to which poor infrastructure in the national grid, a reliance on imports for oil and gas, and the UK’s energy strategy have contributed to prices in the UK.
Gas tends to set the base price of energy in the UK, accounting for around 45 per cent of the bill. This is due to a system called “marginal cost pricing”, by which prices are set according to the most expensive source available.
Although renewables usually represent cheaper energy generation, gas almost always sets prices because it is the last to sell at the auctions, which occur every half an hour.
Prices are set according to gas 98 per cent of the time in the UK, analysis by researchers has shown. Gas sets energy prices for an average of 39 per cent of the time across the EU, and as low as one per cent of the time in Norway.
The system incentivises energy producers to offer lower prices while getting paid for more expensive energy generated by another source. However, it is argued that this system means consumers do not see the benefits of cheaper renewable energy.
Is there an alternative to marginal cost pricing?
The other option put forward by energy supplier Octopus – but later rejected by the government after a review – was to change the market system to zonal energy pricing, where electricity prices would be different according to different areas. Proponents of the idea said energy prices would be cheaper at sites near renewable energy sources.
They argue that the taxpayer would pay less on wind farms, having to turn off for curtailment costs when the grid is at capacity. Data from Wasted Wind suggests that the UK has already paid £1bn on wasted wind power this year.
Energy from wind farms – such as the Viking plant on the Shetland Islands – is also often unable to reach areas of the country.
A report by Renewable UK claimed that wind farms accounted for 24 per cent of constraint costs between April 2024 and January 2025, and the payments more often concern gas plants.
Several critics of zonal pricing say it would lead to a “postcode lottery” system and undermine investor confidence at a critical time for the government’s energy transition.
The government decided “a single national wholesale price is the right way to deliver a fair, affordable, secure, and efficient electricity system”.
Are gas prices solely responsible for high energy prices?
Gas prices are not solely responsible for high energy prices.
UK gas prices increased following the Covid pandemic, and spiked further following Russia’s full-scale invasion of Ukraine in February 2022. This resulted in a 54 per cent price-cap increase in April 2022.
While the price of gas has fallen in the following years, it is still over 40 per cent higher than at the end of 2021.
While wholesale gas prices have fallen over the year, electricity prices have been generally stable.
However, beyond the market cost of energy, electricity prices also comprise network costs, energy supplier costs, subsidies for green energy, VAT, and suppliers’ profits.
These taxes and other cost components make up more than half of the bill, meaning gas prices are not solely responsible for an uptick in prices.
Is net zero inflating energy prices?
Net zero is partly making energy prices more expensive.
Given that gas prices do not cover a significant portion of energy costs, there are growing concerns over whether net zero levies and limits on North Sea expansions have made bills disproportionately expensive.
The rate of taxes varies depending on the energy source and whether households or businesses incur expenses.
Levies are mainly used to fund subsidies for renewable energy, national grid upgrades and carbon capture, as well as various other energy projects.
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There is also no cap on industrial bills; however, bulk purchasing of energy through contracts reduces the price per unit.
All subsidies together put the annual cost at around £25.8bn, according to the Renewable Energy Foundation.
Industry groups, including the Confederation of British Industry and Centrica, the owner of British Gas, have argued for subsidies and upgrades to be stripped from energy costs.
Octopus Energy boss Greg Jackson has also warned that piling more net zero costs on bills could lead to a “snap” putting an end to all investment in renewable energy.
Which levy is driving up electricity bills?
One of the most significant subsidies for renewable energy generators lies in the Contracts for Difference (CfD) scheme, which allows low-carbon generators to receive an inflation-linked price for the power they produce over a 15-year period, regardless of fluctuations in the wholesale price.
The minimum price is protected through taxes on consumers.
This means that if wholesale prices fall below the “strike price” set through contracts – which are awarded to energy producers through auctions administered by a state-backed organisation – then Brits incur the bill.
Policymakers designed the scheme to encourage developers to generate profits for reinvestment in building, even when costs rise and prices fall. Generators pay back any surplus above the set price to the scheme.
Researchers at net zero groups say that, while CfDs added some £27 to household energy bills in 2024, there was a reduction in wholesale costs due to the energy transition.
Much of the UK’s future in energy pricing depends on strategic planning around building infrastructure as well as clean power, analysts at research companies, including Aurora, have argued.
A report by the Institute for Fiscal Studies in June argued that an “uneven” tax system – as through the CfDs scheme – that did not levy a uniform carbon tax across all sources of emissions had pushed industry and consumers towards gas, which makes net zero “more costly to achieve”.
“The CfD scheme, for example, provides subsidies for renewable energy generators, paid for by a tax on all electricity produced. But gas piped into people’s homes or businesses is not subject to this tax,” IFS researchers Lucie Gadenne and Bobbie Upton said in a report this summer.
“These subsidies could be funded through taxes that fall on all energy sources equally, gas and electricity alike.”
Is the UK reliant on other countries for energy?
Over two-thirds of the energy produced in the UK came from low-carbon sources – meaning either renewables or nuclear – between April and June this year, according to government data.
However, the UK relies heavily on imported oil and gas to meet a significant portion of its energy needs, as demand consistently outstrips supply.
The UK has been a net importer of energy since 2004, importing 43.8 per cent of its total energy consumption, according to Offshore Energies UK (OEUK).
The trade body said in 2024, the net cost of energy imports to the UK was £20.9bn. This amounted to around 0.6 per cent of GDP. The report warns that the UK will rely on imports for 70 per cent of its oil and gas by 2030 unless it turns to the North Sea for energy production.
Nearly half of the UK’s gas supply and 44 per cent of its oil are imported into the country, according to energy thinktank Ember.
Professor John Underhill, an energy security expert at the University of Aberdeen, warned that the UK relies on Norway for much of its gas imports. Earlier this year, Norway warned that its oil supplies are dwindling.
Professor Underhill told City AM: “It’s crucial to have contingency for the unexpected and one way of improving the situation is to seek more energy independence as that underpins national security through more UK domestic production.”
Can the government both grow the UK economy and push for net zero?
In June, the government pledged to introduce exemptions to green levies for over 7,000 businesses in its industrial strategy, reducing bills by up to a quarter.
Some experts have criticised the government for its use of renewable energy levies.
Professor Underhill says that these costs of new renewable infrastructure are unavoidable: “At the end of the day, it is inevitable that the billpayer and taxpayer will see some of the costs of the investment in the new power networks land on their doormats or arrive in computer inboxes.
The main way to reduce energy bills in both the short and long term would be to improve energy efficiency levels.
Insulation is one key issue facing households and some businesses, although changing regulations can lead to unintended consequences and extra costs for businesses.
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Public finances also face looming threats from climate change and the drive to net zero.
Earlier this year, the Office for Budget Responsibility (OBR) said climate change could see nearly seven per cent stripped off the UK economy over the next 50 years if temperatures rise by up to three degrees Celsius.
Other economists believe global GDP will face a hit of up to 27 per cent.
However, concerning data, it stated that the total revenue loss to the government from the energy transition, including lower fuel duty, VAT, and other taxes, could amount to more than £800bn by 2074.
The hit to GDP from fiscal costs would represent nearly a fifth of the UK economy,
How does Ofgem regulate energy?
Ofgem regulates the conduct of energy companies by setting the conditions of the licenses which it grants them.
It can penalise companies up to 10 per cent of their turnover for breaching these conditions or violating competition rules. It can impose prison sentences and unlimited fines in response to market manipulation or insider trading.
Earlier this year, Ofgem called for a “culture change” among energy companies following complaints over phone line wait times and billing problems.
Ofgem also licenses electricity generators, sets rules on energy storage, and oversees the distribution network.
In April, the regulator announced a scheme to encourage companies to invest in Long Duration Electricity Storage (LDES) facilities to supply the national grid in times of need.
By CityAM
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