Why UK electricity costs 50% more than it should

The UK’s electricity price is the highest among major European economies, roughly 50% above the EU average, according to recent data compiled by the energy consultancy Auxilione. For a typical household on a standard variable tariff, that means an annual bill around £1,800 for electricity alone, even before gas is added. The question is why, and whether anything can be done about it.

As reported by the BBC, the problem is structural, not a short-term blip from the energy crisis. Three interlocking factors keep prices high, and each one has a direct impact on what homeowners pay.

The gas anchor effect

The single biggest driver is the way wholesale electricity is priced. Britain operates a ‘marginal pricing’ system: the last power plant needed to meet demand sets the price for all generators. That last plant is almost always gas-fired, because renewables are intermittent and nuclear runs baseload. So even when wind farms are producing at 50% of capacity, the price they receive is set by the cost of gas.

Ofgem’s own analysis shows that gas sets the wholesale price about 80% of the time. In 2023, when gas prices were elevated, the average wholesale electricity price was £112 per MWh, roughly double what it would have been under a system that paid renewables their actual cost. For a household using 3,500 kWh a year, that wholesale premium alone adds roughly £120 to the annual bill.

But the catch is that the government has repeatedly rejected reform. The ‘decoupling’ of gas and renewables pricing, a change that the Energy Systems Catapult says could cut household bills by £100 a year, has been debated since 2021. No legislation has been introduced.

Network charges that penalise the clean grid

The second factor is the cost of getting electricity from where it is generated to where it is used. Network charges, paid by suppliers and passed directly to households, account for about 18% of a typical bill, or roughly £180 a year for a 3-bed semi, according to Ofgem’s 2024 retail market report.

Those charges are structured in a way that makes them higher for electricity than for gas, and higher still for users who draw power at peak times. The result is that households installing heat pumps or electric vehicles, which increase electricity consumption, face disproportionately higher network charges than those sticking with gas boilers and petrol cars. The Energy Saving Trust estimates that a heat pump household pays about £60 more per year in network charges than an equivalent gas-heated home, purely because of the tariff design.

Ofgem is consulting on a ‘cost-reflective’ reform that would shift some network charges to a fixed daily standing charge. But consumer groups warn that would hurt low-income households who use very little electricity.

Policy costs loaded onto electricity

The third factor is the most politically charged. Green levies, the costs of funding renewables subsidies, energy efficiency schemes, and social programmes, are applied almost exclusively to electricity bills. The government’s own figures show that policy costs add about 8p per kWh to electricity, compared with just 2p per kWh for gas.

That 6p difference is not trivial. For a household using 3,500 kWh of electricity and 11,000 kWh of gas a year, the policy-cost gap amounts to roughly £180 a year. It is effectively a tax on electrification, the very thing the government says it wants to encourage.

What this misses: The government announced in the 2023 Autumn Statement that it would shift some policy costs from electricity to gas, but the change has been delayed twice. The current timeline has it starting in 2026, three years after the pledge. Meanwhile, households considering a heat pump or solar panels are left paying the price of a policy mismatch.

What homeowners can actually do

Structural reform is a matter for Westminster, not for individual households. But there are steps that reduce exposure to these costs. Installing solar panels and a battery can cut grid electricity use by 60-70%, avoiding both wholesale and network charges. Switching to a time-of-use tariff, such as Octopus Flux or EDF’s GoElectric, can shift consumption to cheaper periods when network charges are lower.

Households on standard variable tariffs should check whether they can save by moving to a fixed-rate deal. The current fixed-rate market is roughly 5% cheaper than the price cap, according to comparison site Uswitch. But the cap is expected to fall again in April 2025, so locking in now may not be wise. The best advice: visit the Energy Saving Trust’s tariff checker, compare at least three suppliers, and avoid exit fees.

For those planning a heat pump or EV, ask your installer or supplier about dedicated heat pump tariffs, Octopus’s Cosy tariff, for example, offers cheaper rates for heating hours. The difference can be £150-£200 a year.

The structural problems will not be solved overnight. But understanding where the costs sit, and which ones you can avoid, is the first step to cutting your bill.