Why Are Electricity Bills Going Up?

Gas prices have played a part in rising electricity bills but the impact of renewables is larger.

Introduction

Ofgem recently announced an increase in the energy price cap for the period April-June 2025. Overall bills went up 6.4% from £1,738 to £1,849 including VAT for dual fuel users paying by direct debit.

Various commentators were quick to blame rising gas prices for the increase. They were right to do so, because about £79 of the £111 increase in total energy bills can be attributed to the direct fuel component of our bills which is mainly gas. The increase in electricity bills was £33, of which £27 came from increases in direct fuel costs which is mostly gas.

Some of you may have seen my appearance on the Jacob Rees Mogg show on GB News debating this with Bob Ward.

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In that discussion, I urged viewers to zoom out and look at the longer-term drivers of higher bills and reeled off some statistics about the cost of renewables subsidies. That exchange prompted me to dig a bit more deeply into the changes in the Ofgem price cap since it came into effect in 2019 and look into the crystal ball to see where electricity prices are going.

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 renewables.

Direct Fuel Costs

Direct Fuel costs are the largest component of electricity bills and most of it is the cost of gas. The name is something of a misnomer because this component includes the cost of Contract for Difference (CfD) subsidies. 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.

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.

Adjustment Allowance

The Ofgem explanation for this cost is somewhat vague. It appears it is an allowance for suppliers to cover bad debts run up by customers struggling to pay their bills. This cost has been attributed to Other Costs in the analysis below.

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. The total cost of this element is about £500m per year for electricity and £217.5m for gas bills (see Annex 4 Tab 3e ECO). There are other components such as assistance for those in areas with high electricity distribution costs, the Green Gas Levy and new this period, 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.

Operating Costs

These are an allowance for the operating costs of electricity suppliers and for this analysis have been classified as other costs.

Other Costs

There are several other costs elements that only make up a small proportion of the overall bills. These include an allowance for Smart Meters, an adjustment for paying by different payment methods (PAAC), another adjustment for those paying by prepayment meters (PAP) and Headroom for uncertain costs (HAP) that is supposed to act as an incentive for suppliers to compete in the marketplace.

Profit and VAT

There is another element called EBIT that is supposed to represent a fair profit margin for suppliers. For electricity, this has gone 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.

Change in Electricity Bills

Now we have the definitions out of the way, we can look at which parts of our electricity bill have change most since April 2019. All data from Ofgem Annexes 2, 4 and 9 using Tab 1c, where the figures are for constant consumption of 2,700kWh per year (see Figure 1).

Figure 1 - Change in Electricity Bills April 19 to April 25 (£)

Overall electricity bills have gone up by £339 from £587 to £894 including VAT. The biggest component increase is in renewables related items that have gone up by £128. Of this, Network costs are up £75, Capacity Market £12 and the three subsidies are up £40, split into a £25 increase for RO’s, CfDs £11 and FiTs £4.

Direct fuel costs are up £113, largely reflecting the 50% increase in wholesale electricity prices from £61.90/MWh to £93.07/MWh. In the same period gas prices are up more steeply by 77%, going from £21.75/MWh to £41.45/MWh. The gas price they have used equates to about 121p/therm which was the gas price in mid-January. It rose to a peak of over 140p in mid-February but has since fallen to around 100p/therm. Gas futures prices have also fallen as global tensions have eased with the ceasefire in the Israel/Gaza conflict and the prospect of peace in Ukraine. Of course, gas prices would fall further and faster if we lifted the ban on onshore and offshore drilling, increasing our own domestic supply of gas. We might hope that both gas and electricity bills will fall below the price cap if suppliers can take advantage of the latest lower prices. Of course, the renewables related costs will not fall with gas prices – in fact CfD subsidies will rise – so we will not feel the full effect of falling gas prices in our bills.

Other Costs are up £49 since 2019, with the operating costs (£20), Adjustment Allowance (£14) and Smart Meters (£6) making up the bulk of the change. Policy costs (ex-ROCs and FiTs) are up £21 with ECO (£14) and WHD (£4) making up the bulk of the change. The increase in overall bills has pushed up VAT by £16. Increased bills coupled with a bigger margin has pushed up the profit element of bills by £12.

Where are Electricity Bills Going?

We should now look into our crystal ball and make some informed judgements about where electricity bills are going.

Cost of Subsidies

If we start with the biggest scheme, ROs we can see from the OBR Outlook that the RO scheme cost £7.6bn in 2023-24 and the cost is forecast to rise to £8.5bn in 2026-27. This element of our bills will continue to go up.

The second scheme is Feed-in-Tariffs (FiT) and we can see from Ofgem’s latest report that it cost nearly £1.9bn in 2023-24, or around £221/MWh. FiT contracts are index-linked so we can expect the cost of the FiT scheme to continue to rise in line with inflation, meaning this element of our bills will continue to go up too.

Finally we have the Contract for Difference (CfD) scheme where data from the Low Carbon Contract Company shows the CfD scheme cost a record £2.4bn in subsidies during calendar year 2024. CfD contracts are index-linked too, so we might expect the cost of subsidies to rise as the indexation of existing contracts overwhelms the lower prices of some new developments.

We can expect the total cost of subsidies of about £12bn, or the equivalent of £420 per household to continue to go up over the next few years.

Grid Balancing and Backup

If we turn now to balancing and backup costs, the NESO report for 2023/24 shows grid balancing cost £2.54bn. As the grid take on more intermittent sources, we might expect the volume of grid balancing to increase, but the cost will be largely dependent on the cost of gas.

According to the OBR, backup from the Capacity Market cost £1bn in 2023/24 and they forecast these costs to rise to £4bn per year in 2027/28. Even if balancing costs remain constant, we can expect the total costs of balancing and backup to rise by £3bn by 2027/28 or the equivalent of over £100 per household.

Clean Power 2030

NESO estimated the Clean Power 2030 Plan (CP2030) would cost £44-48bn per year to the end of 2030, or a total of £264-290bn over the six-year period. Assuming a cost of capital of 8% and operations and maintenance costs of 2% for CP2030, would give an ongoing cost of £26-29bn per year or £900-1,000 per household, offset to some extent by using less gas with the maximum gas saving of about £7bn per year if gas prices remain at 120p/therm for the foreseeable future.

Taxes on Gas-Fired Electricity

Energy bills are also increased by the taxes placed on gas-fired electricity generation which is subject to the Emissions Trading Scheme (ETS). The UK ETS Authority has set the carbon price for 2025 at £41.84 per tonne of carbon dioxide. Actual carbon prices vary somewhat, but this price can be used to estimate the extra costs of gas-fired generation. Modern gas turbines emit around 350kgCO₂/MWh of generation, so gas-fired generation attracts a carbon tax of about £14.60/MWh. NESO’s CP2030 plan anticipates carbon prices rising substantially to around £147 per tonne, so even though the amount of gas-fired generation on the grid will fall, the cost of this generation per MWh will go up with increased carbon taxes adding further upward pressure to energy bills.

Conclusions

We can see that the direct and indirect cost of renewables has been the biggest driver of increased electricity bills since 2019. Increased gas prices have also played a part in this increase, but there is reason to believe gas prices will fall with easing global tensions and even more reason if we were to lift the damaging bans on new gas drilling.

However, looking forward we can see that electricity bills are going to keep on rising because of increased subsidies and backup costs. The extra spending on new renewables and grid infrastructure contained in CP2030 plan means prices will continue to go up from their already high levels.

It is time to change course and abandon Net Zero, declare an energy emergency and go all out for cheap and abundant energy.

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