Why Britons pay so much for electricity

In addition to providing environmental benefits, renewables are supposed to help cut utility bills, because they generate electricity much more cheaply than gas power stations, Britain’s main source since the 1990s. The secretary of state for energy, Ed Miliband, stresses that renewable energy is “desirable, because it can lead to cheaper, more secure electricity".

But there is little evidence that renewables are making electricity cheaper. According to the International Energy Agency, which tracks end-user tariffs, in the rich world British industry pays the most for its electricity, often by an astonishing margin. Prices are 50-100% higher than in most of continental Europe and more than three times those in America (see chart). British households also face painful tariffs. Although they benefit from a regulatory cap on energy prices, this is adjusted quarterly and has been rising since October. On February 25th Ofgem, the energy regulator, announced the latest increase, a whopping 6.4%, to take effect on April 1st.

Electricity in Britain is expensive because it is not renewables that set the wholesale price, but gas. Despite increasing capacity, renewable sources cannot provide a steady supply of power all the time. Wind turbines stop turning on calm days; solar panels provide little electricity when it is cloudy (and none at all at night). So Britain still depends on gas (as well as on nuclear stations, which provide baseload power) for the rest. The overall price of electricity needs to be high enough to keep gas stations in business. Since gas prices have doubled in the past year, that means dearer electricity.

Most other countries use the same system, known as marginal pricing. But it affects Britain disproportionately because the country almost always needs some gas-powered electricity, even though it is meeting a declining share of demand. Research published in Energy Reports in 2023 found that gas sets the price of electricity 98% of the time in Britain, compared with a European average of 58%. Countries on the continent benefit from more interconnected networks that make it easier to import electricity when demand outstrips supply.

This affects the wider economy. For companies, high electricity bills erode profits and hamper investment. British steelmakers pay £37m ($48m) more for electricity each year than they would if they faced the same prices as their German competitors, according to UK Steel, a trade body. Energy-intensive manufacturing is affected most, but hospitals, supermarkets, airports and offices all guzzle lots of power. Higher overheads hit their bottom line (or, in the case of the National Health Service, the public purse).

As for consumers, in 2021 the average household spent 3.5% of its disposable income on utilities, including gas for heating and cooking as well as electricity; today that figure is around 5%. In England 13% of households are below the poverty line and live in homes that are hard to keep warm.

What to do? The most obvious solution would be to increase the amount of time that Britain can manage without recourse to gas-fuelled electricity. This would mean that a cheaper form of electricity would determine the price more of the time. But it would require lots more investment in renewables. Though government efforts to speed up approval for solar parks and onshore wind farms are encouraging, sufficient extra supply is unlikely to come on stream quickly.

In any case, more wind and solar power brings problems of its own, because Britain is spectacularly poor at dealing with excess renewable supply. Despite improvements in battery technology, capacity is far too small to store the volumes of energy needed to make a real dent in electricity prices. National Grid, which operates distribution, actually pays wind farms to switch off when the network cannot deal with surplus supply. That lifts network costs, which already account for a good chunk of end-user bills. Pumped hydro facilities could, in theory, store more energy, but Britain has few of them. They need elevation (a mountain, ideally) and reservoirs above and below, as they work by using excess electricity to pump up water, and then release it to generate electricity during periods of high demand.

So British electricity bills look set to remain eye-watering until either gas prices fall sharply or storage improves. This will make the government’s desire for stronger economic growth all the harder to fulfil.

Correction (March 14th 2025): An earlier version of this story misattributed UK Steel’s estimate of the additional cost of electricity to the steel industry.

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