Why are electricity costs so high?

The UK has much higher electricity costs both for consumers and businesses than many other industrial countries. 

This might seem strange as we keep hearing that renewable energy such as wind and solar is much cheaper than electricity produced by fossil fuels or nuclear power. We also know that the percentage of electricity produced by renewable sources has been growing so logically the price should be dropping.

The fundamental answer to this paradox is that we have added renewables to an energy system that was designed for a different age with a different set of problems.

The wholesale price of electricity

By far the largest element of your bill is the “wholesale” price which is the cost that suppliers buy electricity from the companies that generate electricity. On top of this there are network costs and various policy costs.The price your electricity supplier charges you incorporates these cost elements plus their profit with the maximum price being restricted by the price cap.

This wholesale price is calculated every half hour via a bidding process. In least cost order you would have renewables, then nuclear and then gas. However, the wholesale cost is set by the last unit of electricity needed to meet demand at that point in time. This means that even if gas only generates a small percentage of the power required, the wholesale price is set by the price of gas.

Taking power from the generators to the socket in your house

Once the price has been set then the ‘balancing mechanism’ takes place which determines whether it's practical to take the power from everyone who has bid. So you might find the wind power is all from Scotland but we haven’t got the infrastructure to use this power in the south of England. In this scenario we currently pay the wind farms to turn off their turbines and pay the gas companies an even higher price for the additional gas. In 2024 Seagreen Offshore wind farm was paid to turn off over 70% of the time!

The system is clearly insane. In the previous era there were relatively few very large coal and gas generators who all quoted roughly the same price and the balancing activity was just whether there were any unexpected minor faults in the system. Nowadays there are very wide price differences, a large number of generators, a variable supply of renewable energy hour by hour and the need to ensure the technical stability of the grid. All of this is being managed in a semi manual fashion.

Where are we heading?

Our electricity system is reducing the level of carbon emissions as each year we are using more renewable power. However, we are not passing any cost benefits on to citizens. The solution lies in sorting out our privatised energy infrastructure and short term looking at zonal or local pricing which would bring prices down.

The analogy that is sometimes used for our electricity system is that it is like a pedestrian trying to cross a busy motorway and we have got halfway. Turning back is not a good option as it would take just as long as going forward. If we can get to the other side our electricity costs will be very low but being stuck in the central reservation is not a great place to be.