Why Is Energy So Expensive in Britain? -

From 1 October, the typical UK household’s annual energy bill rises by £60, taking it from £1,663 to £1,723. Ofgem has been direct about the cause. Higher wholesale gas prices, driven largely by volatility connected to the conflict in the Middle East, are pushing costs up again. It is the second confirmed rise this year, following a steep increase over the summer after tensions around Iran and disruption near the Strait of Hormuz unsettled global gas markets.

Why does a shock happening thousands of miles from Britain, in a market Britain barely trades with directly, end up on a household’s bill within months? And why does Britain seem to feel these shocks more sharply than many of its neighbours, even when the initial disturbance is identical for everyone?

Why a war thousands of miles away reaches your bills

Gas is traded globally, and buyers everywhere are effectively bidding against each other for a limited supply. When a geopolitical event threatens that supply, or even just raises the risk that it might be threatened, buyers in unaffected countries start competing harder for the gas that is still available. That competition pushes the price up everywhere, including in countries that have no direct trading relationship with the region in question and no exposure to the conflict itself. Britain does not need to import gas from the Middle East for a Middle Eastern crisis to raise the price it pays. It only needs to be part of the same global market as the countries that do.

That much explains why gas gets more expensive. It does not yet explain why your electricity bill moves as well. Britain generates electricity from a mix of sources, including wind, solar, nuclear and gas, and in 2025 gas remained the single largest contributor, supplying around 31 to 32 per cent of the country’s electricity, just ahead of wind. It would be reasonable to assume that gas prices only affect the cost of the electricity that is actually generated from gas. In reality, gas can set the price of electricity across the entire system, including the electricity generated by a wind turbine that never burns a unit of gas in its life.

This happens because of how Britain’s wholesale electricity market is priced. At any given moment, the National Energy System Operator has to bring together enough generation to match demand, calling on the cheapest sources first and adding more expensive ones as needed until supply meets demand exactly. Whichever source is the last one called upon to meet that demand sets the price that every generator is paid for that half hour, regardless of how cheaply they actually produced their electricity. Gas is very often that final, marginal source, because it can be switched on and off quickly to fill gaps that wind and solar cannot always cover. So when demand needs topping up and a gas plant is the one doing the topping up, the price of gas at that moment becomes the price the entire market is paid, including every wind farm and every nuclear plant already running. A cheap source of electricity can end up being sold at an expensive one’s price, simply because of what happened to be needed at the margin.

Why Britain is more exposed than many of its neighbours

If gas prices rise everywhere, an obvious question follows. Why doesn’t every country feel it equally?

Ofgem’s own analysis, published in its January 2026 State of the Market report, makes the shape of the problem clear. UK electricity prices sat 44 per cent above the European Union median for households and 92 per cent above it for medium-sized businesses, while UK gas prices were much closer to the middle of the European range.

Britain’s issue is not primarily that it pays more for gas than its neighbours. It is that the gas it does buy has an outsized influence over the price of everything else on the grid, because of how central gas remains to the marginal pricing mechanism described above. This is largely the product of choices made over the past three decades. Following privatisation of the electricity industry in the early 1990s, newly competitive generators turned to gas in what became known as the dash for gas. Cheap and plentiful supplies from the North Sea let them replace ageing coal plants quickly and profitably, and gas has anchored the system ever since.

Britain also built comparatively little gas storage of its own. When Centrica closed the Rough facility in the North Sea in 2017, then the country’s largest storage site, the government declined to support a replacement. That decision left Britain with only a few days of gas held in reserve, compared with several weeks held by some of its European neighbours.

Nuclear power supplied around a quarter of Britain’s electricity through the 1990s, but it was allowed to decline steadily as old plants closed and too few new ones were commissioned to replace them. That trend continued into 2025, when nuclear’s share fell to just over 12 per cent of total generation as further reactors were retired. France made the opposite choice over the same period, committing to a sustained national nuclear building programme and never letting its share shrink anywhere near as far.

A household’s energy bill is also not simply the wholesale cost of gas and electricity passed straight through. Ofgem’s price cap is built from wholesale energy costs, the cost of maintaining and upgrading the electricity and gas networks, government policy costs such as environmental and social levies, and suppliers’ own operating costs and margins.

Some of these are fixed by global markets and are largely outside any government’s control, while others are the product of domestic decisions This October’s increase offers a useful illustration. The rise is being driven almost entirely by gas, while electricity costs are staying comparatively stable, in part because the government removed VAT from domestic electricity bills.

What Britain could actually do about it

It would be tempting to conclude that Britain simply needs to build more wind and solar capacity and the problem will resolve itself over time. That conclusion is too neat, and the international evidence does not fully support it. Two contrasting examples make the point well.

France draws roughly two thirds of its electricity from nuclear power, with low-carbon sources, nuclear and renewables combined, accounting for more than 95 per cent of generation in 2025, according to its grid operator RTE. Because so little of France’s electricity depends on gas at the margin, a gas price shock has a much smaller effect on French household bills than it does in Britain.

Germany complicates the story in the other direction. It generated 59 per cent of its electricity from wind and solar in 2025, more than any other country in the European Union, and its renewable capacity has expanded rapidly over the past two decades. Yet German households pay some of the highest electricity prices in Europe, around a third above the EU average and second only to Ireland. Renewable expansion alone did not deliver cheap electricity, partly because gas still plays a role at the margin during periods when wind and solar output falls, and partly because network and policy costs in Germany remain substantial. Renewables alone, without parallel investment in grid capacity, storage and market design, do not automatically translate into lower bills for the people paying them.

For several years, the British government has consulted on whether to break the single national electricity price into several regional zones, so that prices in areas with abundant local wind or solar generation could be lower than prices elsewhere. In July 2025, the government decided against this approach, choosing instead to keep a single national price while reforming aspects of how that price is calculated, including the charges generators pay to connect to and use the transmission network. Supporters of zonal pricing argued it would better reflect where electricity is actually cheap to produce and encourage investment in the right locations. The government’s own reasoning for rejecting it centred on protecting investor confidence in renewable projects already under construction, avoiding stark regional price disparities between, say, windy parts of Scotland and populous parts of the south, and preserving the simplicity of a single national market during a period when rapid investment is already needed elsewhere.

What actually moves the needle, based on the evidence from France, Germany and Britain’s own market design debate, is unglamorous and slow. Grid capacity to move electricity from where it is generated to where it is needed, storage to smooth out the gaps between generation and demand, and a market structure that lets cheap generation set prices more often, all matter more than the headline mix of generation technologies. Of the three, expanding grid and storage capacity is the most tractable in the near term. It does not require resolving the deeper, more contested question of how the wholesale market itself should be redesigned, a debate Britain has already spent three years on without a clean resolution, and it delivers benefits regardless of which direction that longer argument eventually goes.

Why this matters beyond your bills

Lower energy costs feed through in two directions at once. For households, less spent on gas and electricity means more disposable income available for everything else, from everyday spending to saving. For businesses, lower energy costs reduce the cost of producing goods and services, which can support competitiveness, investment and, over time, prices for everyone else in the economy.

Energy policy is an input cost that runs through the entire economy, and Britain’s particular exposure to gas price shocks is a structural weakness with consequences well beyond any single bill.

💼 Unpacked

Marginal pricing — The system used to set the wholesale price of electricity, in which the last and typically most expensive source of generation needed to meet demand at a given moment sets the price paid to every generator supplying electricity during that period, regardless of how cheaply they actually produced it.

Wholesale energy market — The market in which energy suppliers and generators buy and sell gas and electricity in bulk, before it reaches household bills. Prices here respond to global supply and demand, and changes typically feed through to retail bills with a delay of weeks to months.

Zonal pricing — A proposed alternative to Britain’s single national electricity price, under which the country would have been split into regional zones with prices reflecting local generation and demand.

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