Why UK electricity prices are stuck above Europe

The average UK household pays 28p per kWh for electricity, roughly 40% more than the French and 30% more than the German household. That gap is not new, but it is widening. And it is not caused by the war in Ukraine, or by North Sea gas depletion, or by wind power. It is caused by three design choices in the UK electricity market, as reported by BBC News. Each one lands on your bill. Each one is fixable, but the fixes are politically difficult.

The gas tail that wags the electricity dog

Britain operates a marginal pricing system, technically called ‘merit order dispatch’. Every power station bids into the wholesale market. The cheapest, nuclear, wind, solar, bid near zero. The most expensive sets the price for everyone. That most expensive plant is almost always a gas-fired station. So when gas prices rise, the price of every electron rises with it, even the ones generated by free wind. Ofgem data shows that in 2023, gas set the wholesale price 78% of the time, despite providing only 35% of generation. The result: renewable generators earn windfall profits, and households pay the gas premium on every unit they consume. The Competition and Markets Authority estimated this ‘inframarginal rent’ at £2.5bn in 2022 alone.

Network charges: the hidden tax on your bill

The second reason is less visible but just as costly. Network charges, the cost of transporting electricity from power station to plug, account for roughly 20% of a typical bill. Ofgem figures put the average household levy at £240 a year. Much of that pays for maintaining a grid built in the 1960s, designed for large coal plants in the north sending power south. That geography is now inverted: wind farms cluster in Scotland and offshore, while demand clusters in the South East. The grid needs upgrading, and the cost flows to your bill via the Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges. The Energy Networks Association says investment will need to double to £60bn by 2030. That means network charges will rise, not fall.

Policy costs stacked on policy costs

The third factor is the accumulation of policy levies, the Renewables Obligation, the Feed-in Tariff, the Contracts for Difference levy, and the Energy Company Obligation. Together they add about 8p per kWh, or roughly £160 a year for a typical household. These were designed to subsidise the transition to low-carbon generation. But the UK has never reviewed whether they should be shifted off electricity bills and onto general taxation, as Germany and France do. The Treasury has resisted because it would show up as a direct spending line. So the costs stay hidden on bills, where they hit households, especially the 4.5 million on prepayment meters, hardest.

The catch is that fixing any of these would require a government to take on powerful incumbents. Decoupling gas from electricity pricing, the so-called ‘British-style Ibex’ model, would transfer billions from generators to households. The energy industry has lobbied against it. Network charge reform would mean higher standing charges for rural homes, which is politically toxic. And moving policy costs to taxation would require a Budget decision that no Chancellor has been willing to make. Yet the status quo is not neutral. It is a transfer of roughly £9bn a year from households and businesses to generators and grid owners.

What this means for your retrofit decision

For homeowners considering heat pumps, solar panels, or battery storage, the high electricity price is a double-edged sword. It makes the savings from electrification smaller than they should be, because you are displacing expensive electricity with cheaper electricity, not cheap gas. A heat pump running at a COP of 3.5 still costs about the same to run as a gas boiler on current prices. That arithmetic changes dramatically if the electricity price falls by 15–20%, as it would under a decoupled pricing model. The government’s own Net Zero Review, published in January 2024, concluded that electricity prices must fall relative to gas for electrification to be cost-effective at scale. Until that happens, the financial case for heat pumps remains marginal for most households.

Households on standard variable tariffs can check their current electricity unit rate on their bill. Those paying more than 30p per kWh should consider switching to a fixed tariff if one is available, though the market has thinned. The real fix, however, is political. The next government will inherit a market design that penalises electrification. Homeowners should write to their MP, and ask two questions: why does the UK still let gas set the price of wind power, and when will policy costs be moved off bills?