Energy Bills Moron Premium
Even though gas and electricity prices are down, the energy price cap has gone up.
Introduction
Yesterday, Ofgem announced the new energy price cap covering the period from October to December 2025. Overall, the levelised price cap has gone up £35 from £1,720 to £1,755 for dual fuel households paying by direct debit.
Energy Minister Michael Shanks blamed the rise in bills on the “fossil fuel penalty being paid by families, businesses and our economy.” However, close examination of the detailed Ofgem annexes shows that the prices Ofgem assumed for both gas and electricity were lower than last time, yet the price cap went up. Another minister stood by Labour’s promise to reduce energy bills by £300 by 2030.
Ed Miliband even claimed that “wholesale gas prices remain 75% above their levels before Russia invaded Ukraine” as a reason for high prices. But even a cursory glance at the chart of UK gas prices shows they are well below the prices set in the whole of 2022 and Russia invaded Ukraine in February of that year.
In fact current gas prices are lower than most of 2021 and much of 2023 too. If ministers cannot even properly diagnose the problem, then they have no hope of solving it so just like with the interest rate on the national debt, we will continue paying a moron premium on our energy bills until sensible people are back in charge. Let us dig into the detail of the new price cap to find out what is really going on.
Oct-Dec 2025 Price Cap Change in Electricity Bills
The different components of electricity bills and how they have been treated in these calculations are explained in the Appendix at the end of the article. We can examine which parts of our electricity bill have changed most since last time and since October 2018. All data from Ofgem Annexes 2, 4 and 9 using Tab 1c, where the figures are for constant consumption of 2,700kWh per year.
The wholesale cost of electricity has fallen from £84.66/MWh in the last price cap to £83.32/MWh this time (including about £25/MWh carbon tax). Gas prices have also fallen from £32.98/MWh to £31.37/MWh. It is therefore somewhat surprising to see that the price cap for electricity has gone up £25 from £882 (inc. VAT) last time to £907 this time. The main driver of the increase is increased network costs, driven by increased grid balancing costs, effectively higher costs from switching off windfarms when they want to produce more than we need or the grid can handle. A more generous Warm Homes discount and increased CfD subsidy costs also pushed our bills up. Electricity bills are also up £26.53 since the April-June 2024 price cap, the last period before Labour came to power, so the promised £300 reduction is nowhere to be seen.
Zooming out to a longer time fame we can see the how the various categories of cost have changed since October 2018-March 2019, the period of the first price cap (Figure 1).
Overall electricity bills have gone up by £360 from £504 (ex-VAT) VAT in October 2018 to £864 in the latest price cap.
After stripping out carbon taxes, direct fuel costs are up £71 since 2018 but are down just over a £1 since the last price cap. Direct fuel costs, excluding carbon taxes now make up only 23% of electricity bills.
The biggest increase since 2018 is in renewables and Net Zero related items that have gone up by £213. Of this, Network costs are up £97, subsidies are up £57, split into a £30 increase for Renewables Obligations, Contracts for Difference £22 and Feed-in-Tariffs £5. Carbon taxes are up over £30 and now cost about £67, the Capacity Market cost has increased by £14 and the Energy Company Obligation has increased by £15.
Other Costs are up £76 since 2018, with the bulk of the change being an increase supplier operating costs, an allowance for bad debt and the Warm Homes Discount. The increase in allowable margin has also added cost to bills.
Overall, some 59% of the increase in electricity bills can be attributed to Net Zero related items, with 20% to increased fuel costs and the remaining 21% to other items.
Oct-Dec 2025 Price Cap Change in Gas Bills
Gas bills are up £10 since last time despite a £15 fall in the direct fuel costs. The main drivers of the increase are a £9 increase in policy costs, reflecting an increase in the Warm Homes Discount and a further £9 increase in network costs. Operating costs are also up slightly as are debt recovery costs, partly balanced by tiny decreases in other minor components.
Conclusions
We can see that the direct and indirect cost of Net Zero policies and renewables have been the main driver of increased electricity bills since 2018. The more recent increase is also driven by Net Zero, mostly because of the increased grid balancing costs. Arguably the more generous Warm Homes Discount is also a result of high prices driven by the increase in Net Zero driven costs since 2018.
Sadly, we can expect bills to keep on rising, because of the massive spending on Miliband’s Clean Power 2030 plan, where he wants to spend £260-290bn by 2030. As we shall see in a forthcoming article, they are on track to overspend this budget and will save at most £4.5bn/year in gas used for electricity. Yet ministers still claim that our bills will fall (surely they know that we know they are lying by now). Only an idiot would expect bills to go down with this level of spending. Sadly, we can expect the moron premium to get bigger until we get someone sensible in charge of energy policy.
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Appendix: Electricity Bill Components
Ofgem splits our bills down into components and we can break them down further into smaller elements to work out how much of the increase in bills is down to gas and how much to Net Zero policies and renewables.
Direct Fuel Costs
Direct Fuel costs are the largest component of electricity bills and most of it is the cost of gas. However, the name is something of a misnomer because this component includes the cost of Contract for Difference (CfD) subsidies and carbon taxes. So, for the purposes of the analysis below, CfD costs have been stripped out of the direct fuel figure and attributed to the cost of renewables. The carbon tax is levied through the Emissions Trading Scheme on gas-fired electricity. Ember have recently started publishing the carbon cost element of wholesale electricity costs, which helps us to strip this out and attribute that cost to Net Zero too.
Capacity Market
The Capacity Market is mostly required to provide backup for intermittent renewables. Before we had renewables on the grid we did not have a capacity market to speak of. For this analysis, the increase in capacity market costs has been solely attributed to renewables.
Policy Costs
Policy costs contain a myriad of elements including the cost of Renewables Obligation (RO) and Feed-in-Tariff (FiT) subsidies. Other elements include Warm Home Discount (WHD) to help low-income households with their bills and the Energy Company Obligation (ECO) which obliges suppliers to deliver energy efficiency measures to homes. There are other components such as assistance for those in areas with high electricity distribution costs, the Green Gas Levy and the new Network Charging Compensation to compensate energy intensive users for their high electricity charges. For the purposes of this analysis, RO and FiT costs have been stripped out of policy costs and attributed to renewables.
Network Costs
Network costs are the total of the costs of running the transmission system, the distribution network and grid balancing services. For the purposes of this analysis, the increase in network costs has been attributed to renewables, because most of the increase in network costs is down to extra balancing costs because of the increase in intermittent renewables and connecting remote wind and solar farms to the grid.
Other Costs
There are several other costs elements that cover supplier operating costs, industry charges, debt recovery and uncertainty headroom.
Profit and VAT
There is another element called EBIT that is supposed to represent a fair profit margin for suppliers. For electricity, this went up from 1.88% in 2019 to 2.53% of the pre-VAT total in April 2025.
The VAT rate has remained constant at 5% since 2019, but of course because bills have gone up, the total amount of VAT paid has increased too.
The Sunken Cost Fallacy seems to be stronger than a black hole. Most of this thinking was embedded since 2008 where the reaction to the GFC was to drop interest rates to almost zero.
Which incentivises malinvestment. And stupid ideas.
We aren't going to be able to afford this much longer with bond yields predicted to hit 7% or more. If the market actuallly saw us doing something about lowering energy costs and easing tax and regulation on business then we would have a chance.
Fossil fooled no more. Escalating energy prices are a direct consequence of the 'clean energy transition'. Turns out that if you 'trans' the nation's energy supply, all you do is vastly increase costs and diminish security of supply, with disastrous consequences for the economy and for industry, not to mention long suffering domestic energy users plunged even further into 'heat or eat' poverty and who now face the rationing of an increasingly expensive commodity.
Mad Ed's Eco-commie-nomics innit.