Why Britain pays such a crippling price for electricity

Telegraph

a day ago

At a vast stainless steel plant on the edge of Sheffield, Christian Brüggmann's job is to keep things running.
The factory, owned by Italian manufacturer Marcegaglia, is the only one of its kind left in Britain, producing primary stainless steel used in everything from pipes to cutlery.
Yet rather than focusing on production, an increasing amount of Brüggmann's time in recent years has been spent worrying about something else: sky-high electricity prices.
'It's been a roller-coaster ride ever since Covid,' says Brüggmann, the German operations chief at the facility.
'In one day now, you can have swings of £200 per megawatt hour in the price – it just creates so much uncertainty and makes it very hard to plan.'
The Marcegaglia plant is more exposed than most.
It uses a massive electric arc furnace to melt down scrap metal and combine it with other alloys in a large cauldron, with this mixture then poured and cast into slabs.
Even turning the furnace on is a commitment, as it triggers a production process that must continue for three days, regardless of swings in the power price.
Yet Brüggmann's experience is far from unique.
All across Britain today, businesses and households are complaining about the seemingly unstoppable rise of electricity prices.
In the Government's new industrial strategy, ministers singled out the problem as one of the biggest challenges facing domestic factories.
And at the same time, regulator Ofgem has warned that higher prices are forcing more households into poverty.
Ed Miliband, the Energy Secretary, blames the rise on our dependence on gas for generating electricity. His critics claim it is the Government's gung-ho pursuit of net zero that is responsible.
Shocking rise
At her home in Horncastle, Lincolnshire, Sheila Correll often goes from room to room to check she has turned off as many appliances as possible to avoid wasting electricity.
With a weekly income of around £200 from the state pension and pension credit, she often resorts to hand-washing clothes to avoid switching on her washing machine, as she fights to keep her bills to 'as little as possible'.
Yet the 83-year-old widow, who was a legal secretary before retiring, says the task only seems to be getting harder.
'Whatever I do, the electricity bill still seems so high, but I am using the minimum I can use already and there's nothing much left to live on,' she says.
'You never used to have to worry this much about electricity. Looking back, we never even really thought about it. It wasn't the way it is now.'
Take a look at the numbers, and it isn't hard to see why millions of people like her are struggling.
Following Russia's attack on Ukraine, energy prices surged to eye-watering levels as all of Europe scrambled for gas supplies for heating and electricity.
But even with the worst of that crisis now behind us, prices remain much higher than they were beforehand.
Last week, Ofgem published shocking new figures showing that household debts have breached the £4bn level for the first time, up from £1.3bn in 2020.
The explanation for this is simple.
Between 2019 and 2024, wages and the state pension increased by 32pc and 31pc respectively, while power prices surged 58pc for medium-sized households, according to official figures.
For a typical household that consumes around 3,100 kilowatt hours (KWh) of electricity per year, this has led to an annual power bill of about £930, up from £589 in 2019, with taxes included. (A washing machine typically consumes about 1KWh of power per cycle.)
Yet even the cost of abstinence has grown.
In the past five years, the average standing charge for a household that consumes no electricity has also jumped from about £7 to just under £15 per month, according to regulator Ofgem.
'The standing charges are horrendous,' says Mrs Correll, in Lincolnshire. 'And with all the taxes as well, it's even worse. Without them I'd be a damn sight better off.'
And it isn't just households that have had to swallow bigger costs.
Businesses are arguably even worse off, with British factories paying the highest electricity prices of any developed country, according to the International Energy Agency.
Their costs more than doubled between 2019 and 2023, the most recent year for which data is available.
British industrial users paid 25.85 pence per kilowatt hour when taxes were included, up from 11.55 pence just four years earlier.
Crucially, this was 45pc higher than in France and Germany and four times what American companies paid.
In Marcegaglia's case, paying for power directly accounts for roughly 25-30pc of the Sheffield plant's outgoings, says David Scaife, the company's chief financial officer in the UK.
'We're obviously happy that electricity has dropped to lower levels than two years ago,' Scaife says. 'But prices are still much higher than they were before the pandemic.
'When we're looking at our ability to compete in the world market, that is pretty damaging. We export more than 90pc of our production, mostly to the EU and the US, both of which have pockets where power is far cheaper than it is here.
'So our competitiveness is very dependent on getting lower electricity costs.'
The high price of power was recognised as 'one of the most pronounced challenges to the competitiveness of our energy-intensive sectors and the attractiveness of the UK to foreign investment', according to a government report last week released as part of the industrial strategy.
In a worst-case scenario, it also puts Britain 'at risk of de-industrialisation', a report by manufacturers' body Make UK warned – a scenario that some have warned is already playing out.
Between 2021 and 2024 alone, the output of heavy industrial firms such as paper mills, steel makers, glass blowers and potteries fell by a third because of high energy prices, a recent analysis by the Office for National Statistics found.
And high power prices are threatening not just Britain's traditional industries but also those of the future. Under plans to reach net zero by 2050, the consumption of electricity will only become more crucial as production processes are electrified to cut carbon emissions.
Yet even those at the top in Westminster struggle to fully explain just how Britain became saddled with such crippling electricity costs.
When Labour's Sarah Jones, the industry minister, was quizzed about the cause on BBC Radio 4's PM programme last week, she said the full reasons 'would take all day to explain'.
France, she said, was cheaper, because it had 'huge amounts of nuclear power' while Germany 'has been better historically in terms of industrial energy prices because they've put extra costs on to consumer bills'.
That answer hinted at the failures of past governments to build new nuclear power stations. But it also failed to mention that nearly of a quarter of Germany's power is generated by the cheapest fuel of all: coal.
However, another reason Jones was unable to unpick the cause is the sheer complexity of our energy bills.
They include not just the cost of power but also a multitude of taxes, green levies and other charges that have been introduced over time.
'Growing complexity is a very serious issue,' says Michael Grubb, professor of energy and climate change at University College London.
'It's hard for politicians to understand. And that makes it easier for companies to game the system or to lobby for stuff that sounds plausible.'
So how did things get like this?
Hooked on gas
The way our bills are constructed is key to understanding what is happening to electricity prices.
Look closer, and you'll see that the amount of power you consume only accounts for about one third of your monthly bill.
Another 23pc pays for grid costs such as transmission and distribution, while 20pc pays for green energy subsidies. Another 23pc is set aside for miscellaneous items such as supplier profits, operating costs, metering and bad debt provisions.
'Fundamentally, you've got the price of electricity, then you've got the costs of distributing it, and then you've got all sorts of levies and charges,' says Michael Liebreich, an independent energy consultant and investor.
At the moment, the biggest single factor affecting electricity prices is gas.
Following the discovery of huge gas reserves in the North Sea, the 1990s 'dash for gas' saw a string of gas-fired power plants built across Britain, and they have since become the backbone of our power grid.
Before that, burning coal power plants were our biggest source of electricity.
But in recent decades, successive governments have sought to phase them out with heavier taxes due to their higher carbon emissions.
The rise of renewables is now pushing gas down the pecking order of the power system as well. But because of a market system called 'marginal pricing', gas still continues to influence prices heavily.
Grid operators must constantly keep the supply and demand of electricity in balance at all times by continuously fine-tuning both.
To decide which power plants to use on a daily basis, grid officials will work their way up a list of generators.
They start with the cheapest and carry on until demand is met, eventually sourcing energy from the most expensive supplier.
At the end of this process, the price paid for power is set not by the cheapest but by the most expensive.
This means that even if wind, solar, batteries and other clean power sources provide the bulk of power, but gas-fired plants are used to deliver the final fraction, every generator still receives whatever the gas plant was paid.
'It could be that there's only one of these plants that's needed somewhere, and yet the whole country will pay the peak gas price, which is just insane,' says Liebreich.
The driving idea behind this is efficiency, as power plant owners are incentivised to offer lower prices so they stay on the list of generators for longer.
But it means consumers are being forced to pay for the rollout of supposedly cheaper renewables, while still paying the price of gas.
For instance, a study in the journal Energy Reports found that in 2021, gas was used to generate around 43pc of Britain's electricity but set the national power price 97pc of the time.
This dependence has also left the country vulnerable to global crises such as the Ukraine war, which sent prices soaring and prompted the Government to intervene with a massive support scheme.
The renewables rollout is also leaving us more exposed to gas in other ways, too.
We have not yet upgraded the power network to carry all the electricity being generated by wind farms in Scotland, so when the grid becomes too congested, we are instead switching turbines off.
At the same time, grid operators will then fire up a gas plant elsewhere to make sure demand is met.
This leads to huge so-called 'curtailment' compensation payments to wind farms, all of which are paid via household bills.
Green contradiction
Subsidies are another key driver of power prices. Successive governments have loaded energy bills with a multitude of levies, from those designed to support the rollout of clean power to those meant to help poorer households with their bills.
All are expensive, says the Renewable Energy Foundation, which puts the total annual cost of energy subsidies at around £25bn.
The origins go back to 1990 when Margaret Thatcher's government created the non-fossil fuel obligation, a levy on coal and gas generators.
Its aim was to support privatisation of the nation's nuclear stations, which produced power so expensive that they couldn't attract buyers.
The money funded guaranteed prices for their power, but the key innovation was that levy costs were passed directly to consumers – a mechanism integral to the levies driving bills up today.
Of all of these, the biggest levy is the renewables obligation.
This levy awarded certificates to wind, solar and other renewable generators for each megawatt hour (MWh) of power generated, on top of what they received for power.
At the same time, electricity suppliers were obliged to buy the certificates to compensate for their carbon emissions.
The result was a renewables gold rush, with wind farms springing up across the UK.
The scheme has since been closed to new entrants but owing to the length of contracts awarded, it continues to account for £6.8bn of levies on bills. The cumulative costs since 2002 come to a whopping £67bn.
In 2008, Ed Miliband, in his previous stint as energy secretary, also helped to create the feed-in tariff (FiTs) to boost small-scale renewables such as solar and low-carbon electricity generation.
This pays property owners who put solar panels on their roof for every unit of power generated, even if they use the power themselves.
FiTs have added a cumulative £15bn to bills.
Other similar schemes include the energy company obligation and the warm homes discount.
Altogether, say analysts at Cornwall Insight, such policy costs add a total of £198 to the average consumer bill per year.
And those costs exclude the fastest-growing subsidy of all, contracts for difference (CfDs), under which low-carbon generators are guaranteed a fixed price for their power.
This means developers can build wind farms, solar farms or nuclear power stations safely in the knowledge that, even if power markets plunge, they will be guaranteed a profit.
Last year, CfD subsidies added about £2.5bn to Britain's bills – but you won't see that information set out on your power charges because they are hidden within the figures for wholesale prices.
John Constable, director of the Renewable Energy Foundation, a charity which tracks the cost of such subsidies, says they now amount to costs of £25.8bn a year, or about 40pc of the total cost of supply.
The sheer scale of these subsidies means it is misleading for politicians to keep blaming gas prices alone for high energy costs, argues Adam Berman, policy director at Energy UK, the trade body for energy suppliers.
'It's true that wholesale power prices are driven partly by gas,' he says. 'But wholesale power prices only account for 40 to 50pc of our bills.
'The rest is driven by additional charges, subsidies for renewable energy, and policy costs.'
The combined effect of these issues has created a contradiction: renewables are supposed to bring abundant and cheap supplies of electricity, but the more we add, the more prices are going up.
'You've got to make a distinction between costs and investments,' argues Liebreich. 'We're a generation that's pouring money into our infrastructure. There will be a benefit to all this. But that's been very poorly explained to people.'
How soon those benefits materialise is a crucial question, he admits. 'Saying it will be better in the 2040s is clearly not an answer.'
Greg Jackson, the boss of Octopus Energy, has issued a similar warning.
'The ­reality is, if prices continue to go up, one day the elastic snaps,' he said recently. 'And then you call an end to investment in renewables.'
In search of a solution
So what can be done to bring power prices down?
For environmental groups, the primary blame for high energy prices will always lie with fossil fuels.
They argue that the best way to cut bills is to drive down our reliance on gas by continuing to build more renewables, but crucially, alongside battery storage and grid upgrades.
One of the most influential climate groups is Ember, a London-based think tank that was called on by Labour and Mr Miliband to draft the party's plans for clean power.
In particular, Ember helped to inspire the pledge for clean power by 2030 and provided the workings behind Mr Miliband's ill-conceived pledge to cut £300 from household energy bills.
Josie Murdoch, an analyst at Ember, says: 'Before the energy crisis, the UK had similar electricity prices to other European countries.
'The price of electricity in the UK has remained high because the UK is over-reliant on gas for energy and grid stability, with gas almost always setting the price of electricity.
'Clean power generation and grid stabilising technologies such as batteries will free the UK from this pricing dynamic.'
Prof Grubb, at UCL, says Britain could consider boosting power supplies by building more nuclear power stations, with all but one of the existing fleet set to close by the end of this decade.
But nuclear plants are not cheap. They take years to build, cost tens of billions of pounds and will also generate electricity for significantly higher prices than gas plants.
Not to mention that Hinkley Point C in Somerset has busted its budget several times over, and is currently forecast to cost up to £47bn.
Another option being put forward is market reform. Octopus boss Jackson and Liebreich both advocate so-called zonal pricing, which would split the country's electricity market into regions.
Each would have its own wholesale price. This would mean that when there is too much wind power in Scotland, prices would plummet, while in other areas, higher prices would incentivise the construction of new wind farms closer to cities.
Meanwhile, the Climate Change Committee has called for ministers to take levies off electricity bills to make it cheaper for people to own electric cars and heat pumps.
Yet this idea is riven with political risk, not least because ministers would have to make up the revenue either by shifting the levies to gas bills or general taxation.
The Government insists that levies have successfully driven investment in renewables, reducing the UK's exposure to volatile global fossil fuel prices and protecting consumers against future price shocks.
'Through our clean power mission, we will get off the roller-coaster of fossil fuel markets – protecting business and household finances with clean, homegrown energy that we control,' a government spokesman says.
Ministers have also increased financial support for energy-intensive businesses by providing relief on network charges and other fees.
But Claire Coutinho, the shadow energy secretary, says that while in office she had to constantly battle with officials who wanted to add even more levies to bills.
'Cheap energy has to be our priority – otherwise we will keep offshoring British industry to China, which is just mad,' she says.
In Sheffield, Marcegaglia's Brüggmann says the plant is preparing to invest in a new state-of-the-art electric furnace that will reduce electricity costs and boost production capacity. It will also benefit from the new government scheme to cut power bills.
Yet even with that support, steelmakers will still face higher electricity prices than competitors in France and Germany, according to industry calculations.
'We want to produce more next year,' he says. 'We're the only producer of stainless steel still here. But what's the Government's commitment to this industry?'