The great British electricity puzzle
It turns out that making the transition to clean energy while keeping the price down is hard
Martin Wolf
Why is electricity so expensive in the UK?
Is this the outcome of bad market design, the desire to accelerate the move to “net zero” emissions, or some other difficulty?
If it is, in part, the outcome of climate ambitions, do the latter still make sense, especially after Donald Trump’s US has turned its back on the idea?
These are important questions, not least because Reform is following Trump in running against climate policy.
This debate will not fade away.
That electricity is exceptionally expensive in the UK is evident.
According to a just-published analysis for the House of Commons Library, in the first half of 2025, “UK electricity prices were higher than in all but one EU state (Germany)”.
In contrast, it says, “In the early 2000s UK domestic electricity prices were the second lowest in the (then) EU 15.”
This is painful for households.
As Dieter Helm, an Oxford-based energy expert, notes, it also makes energy-intensive manufacturing uncompetitive.
More broadly, relatively expensive electricity is bound to be a heavy burden on national prosperity in the “electricity economy” that is to come.
So, why are prices so high?
Is this a temporary problem or a permanent block on the road to clean energy?
CarbonBrief noted in January, on the basis of work done by the UK Energy Research Centre, that “high gas prices are responsible for two-thirds of the rise in household electricity bills since before the global energy crisis”.
But this alone cannot explain why electricity prices are so high in the UK: after all, gas prices have been high across Europe.
One explanation is that the price of UK electricity has been driven to an exceptional degree by the price of gas.
This is because of how the markets work: the price is set by the short-run marginal cost and the latter, in turn, is determined by the marginal cost of gas-fired generation, since this is where supply can easily be varied.
Yet another explanation for the price rise is the cost of creating and managing networks, which accounts for 17 per cent of the rise in electricity bills, and policy, which adds another 12 per cent.
But these two are connected. Managing a system based on inherently variable wind and solar energy creates a need for complex and costly network management.
In sum, the UK’s policy-driven move towards clean energy is indeed a driver of the price problem.
What are the possible responses to the painful reality that the desired energy revolution has been associated with such high prices of electricity?
One is to say that the country should grin and bear it, for the sake of the planet.
The problem with this is that, according to Our World in Data, the UK generates just 0.8 per cent of global emissions: the planet will not notice what the country is doing.
A possible rejoinder is that it is at least showing the way to the rest of the world.
But what the rest of the world sees is very expensive electricity.
Who will want to follow the UK on that path?
Moreover, the UK has cut its domestic emissions far more than the emissions created by its consumption.
Thus, between 2012 and 2022, UK territorial emissions fell by 31 per cent.
But the emissions embedded in its consumption fell by a mere 10 per cent.
In effect, the UK has shifted emissions elsewhere far more than it has reduced them.
In brief, a way must be found to lower prices, especially for industry and less well-off households, while sustaining the transition towards what should, in the end, be a world that relies far more heavily on clean electricity and less on the burning of fossil fuels.
Above all, this transition must be global.
One of the policies to achieve this has to be a carbon-border adjustment (CBAM) that bites, ideally co-ordinated with the EU’s.
The obvious targets for this will be the US and China — the US, because it is going backwards, China, because it is going forward too slowly.
Such a CBAM should also help protect industries that will prove vital for the future security of European countries.
Another vital policy must be redesign of the electricity market.
The role of volatile gas prices has to be reduced.
There are a number of possible reforms.
One would be to set fixed-price contracts for renewables and charge consumers an average cost of supply.
An alternative design, Helm suggests, would be to charge long-run marginal cost.
It would make sense, at the same time, to go for long-term, fixed-price contracts for gas.
All this is complex.
But the political reality seems clear: the government has to find a way to lower prices while ensuring huge investments in an ambitious energy transition.
This is a vast challenge.
Yet, if it cannot deliver this combination, its attempt to be a leader may deliver few followers.
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