UK Power Costs Persist, Hint at Opportunity

Four years after Russia's invasion of Ukraine, the world is bracing for another energy crisis. The US-Israel bombing of Iran and then the blockade of the strait of Hormuz have forced up the price of oil. The price of natural gas in Europe has also risen sharply.

In the UK, Prime Minister Keir Starmer has announced a £50 million package to support consumers who heat their homes with oil. The government is also considering a U-turn on the decision to increase fuel duty (currently almost 53p per litre of petrol or diesel) in September after a 15-year freeze. Other taxes would need to go up to compensate.

But the main question concerns what will happen to electricity prices this summer. A sustained crisis could push prices higher for both households and businesses. It could also push the Bank of England to avoid interest rate cuts, making mortgages more expensive. And the government could even end up paying part of everyone's bills directly as it did between 2022 and 2024, piling up tens of billions of pounds of public debt.

To secure most of the future production of electricity - wind farms or new nuclear power stations for instance - the government signs what are known as "contracts for difference" with electricity producers. These contracts fix the price of electricity for decades, typically above expected wholesale prices.

These guaranteed prices correspond roughly to the expected average cost of producing electricity. Unlike gas, once a wind farm is built, each additional unit of electricity costs almost nothing to produce. So, without a guaranteed price, renewable producers would fear having to sell the electricity for free and never recouping their investment.

Consumers are shouldering the risk

The UK is not as sunny as somewhere like Spain and so will never get very cheap solar power . It is also trying to build new nuclear power plants , but the first attempt (Hinkley point C, currently expected to begin delivering electricity in 2030) is so expensive that the French state-owned energy operator EDF lost £10 billion in the process. Future projects now ask taxpayers to take most of the risk and pay upfront in the form of higher bills.

Consumers mostly notice these extra costs added to their bills (called "environmental levies") when gas prices are low. The levies currently make up 6.5% of a typical bill , which is down from 13% after the government shifted some costs so that they would be paid for through general taxation.

So given that they're paying upfront for the infrastructure, consumers might expect renewables to cut their bills when gas prices spike. But that is not how markets work: the price is set by the most expensive unit sold . Around 85% of the time in the UK this most expensive unit uses liquefied natural gas (LNG) transported by boat.

If one day the UK becomes like Spain where prices are mostly set by renewables (thanks to huge leaps in wind and solar), wholesale prices will often be zero. But consumers will still pay more, because they will still be charged the environmental levies that were put in place years before to invest in the infrastructure.

This is what led the CEO of energy giant E.ON, Chris Norbury, to declare in parliament that "even if the wholesale price was zero, bills would still be where they were today". That's true, but also a bit misleading.

Wholesale prices only go to zero because the country invested in renewables. The alternative - going back to more gas - would probably be much more expensive for everyone. It would certainly be more risky as the current conflict in the Middle East is illustrating.

Sunshine and wind do not need to pass through the strait of Hormuz and cannot be used as leverage by dictators. And what looks like a costly subsidy heaping pressure on billpayers in good times becomes insurance in a crisis.

During the peak of the energy crisis in 2022 , the wholesale price of electricity was higher than the guaranteed one, and renewable generators paid money to the government instead of receiving subsidies. But because the government was helping out with everyone's bills, consumers never saw the benefit.

In 2025 in the UK, less than a third of electricity was generated using gas. Replacing renewables with gas would mean building power plants and importing more gas at ever-higher prices and greater geopolitical risk.

Gas is cheaper in the US where fracking makes the country almost energy independent. But fracking is much harder in places that are as densely populated as England. The government is currently planning to ban it everywhere in the UK.

But the UK's vulnerable situation also gives it a chance to innovate and export. The key is making sure that consumers pay a price that reflects the real cost of electricity at any given moment.

The more we switch from fossil fuels - heating, cars, trucks - to electricity, the more battery capacity we have to fill. The price signal (the gap between cheap and expensive electricity) gives industries and households a strong incentive to innovate and invest in storage .

Most people only care about their monthly bill and won't adapt directly. But smart appliances, home batteries and vehicle-to-grid systems (where vehicles can store electricity and sell it back to the grid when required) will do it for them.

The UK can gain in efficiency what nature has not provided in resources. This could give Britain a chance to sell its innovations to the world. Selling services is what the UK does as a country, after all. The large majority of global investments in energy are in renewables, and there will be huge opportunities for the countries that figure out how to run a grid on intermittent electricity sources.

Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.