Why High Energy Prices are High and How to Reduce Them

My evidence to the ESNZ Inquiry into the cost of energy

Introduction

Back in February, the Energy and Net Zero Committee (ESNZ) in Parliament launched an inquiry into the cost of energy. I could not resist the temptation to make my own submission to see what reaction I received. I made my submission in mid-March, but the Committee is quite picky about only considering evidence that has not been published before, so I have held off publishing my submission until now. Below is a copy of their call for evidence, followed by my submission. The only change I have made to my submission is to format it better for web publication by removing paragraph numbers and using links instead of footnotes. A pdf of my submission is included as a download at the end of the article and all the written evidence has now been published.

ESNZ Call for Evidence

The committee is now inviting evidence from individuals and organisations on any or all of the following questions:

1. Are the costs and benefits of the energy system properly reflected in consumer bills?

2. How should consumer bills be insulated from inflated prices due to shocks to the global supply of gas? What needs to change?

3. Where should the costs of decarbonising the grid lie?

4. Is it practical for consumer bills to be reduced by £300 before the end of the Parliament?

5. Does the Ombudsman service provide a responsive, accessible service for consumers in dispute with their energy providers?

The Committee is also interested in the impact of the transition costs on business and commercial users, who do not benefit from the price cap introduced for domestic consumers.

Submissions should be no more than 3,000 words and should not include material that is already published. The deadline for submitting written evidence is 17:00 on Tuesday 8 April 2025.

Evidence on the Cost of Energy

I am a graduate engineer and mostly retired now. However, in recent years I have become concerned that most in Government and the media really do not understand energy and the fundamental part it plays the economy. I decided to utilise my numerical and engineering skills to become an energy analyst writing on the Eigen Values Substack. I welcome this opportunity to respond to the call for evidence on what to do about the cost of energy.

The preamble to the cost of energy inquiry says that ESNZ wants to consider how bills can be reduced for both domestic and commercial consumers. The first question asks if the costs and benefits of the energy system are reflected in consumer bills. We should first deal with costs as these are perhaps the most important topic for discussion. In September 2024, the Government published data about energy prices across the IEA in 2023 that showed that the UK has the most expensive domestic and industrial electricity prices in the countries covered by the study. UK industrial electricity prices were four times higher than the US and 2.6 times those of Korea. Domestic electricity prices were again multiples of those in the US and Korea and some 80% above the IEA median. Industrial gas prices were high compared to America and Canada but on a par with France, Germany and Korea. Domestic gas prices showed a similar story, with UK prices some 2.5 times higher than the US but on the IEA median. Government data for Europe only for the first half of 2024 showed a similar story, with UK industrial electricity prices the highest in Europe with domestic prices the third highest behind Germany and Ireland. UK Industrial gas prices were at the EU median and domestic gas prices were well below average. We can safely say that the costs of our energy system are reflected in our electricity bills, but gas prices are more in line with European norms.

Turning now to benefits, these are much more difficult to discern. Our World in Data (OWID) shows that global coal, oil and gas consumption reached record levels in 2023 and world CO₂ emissions rose to record levels as UK emissions fell to just 0.8% of the global total. OWID also shows that countries that reduce emissions the most grow more slowly than countries with a more measured approach and much more slowly than countries that are increasing emissions. In fact, per capita GDP in the UK has all but stagnated since the Climate Change Act of 2008 while emissions have plummeted, demonstrating that there are no benefits to the UK from rapid decarbonisation.

Question four asks if it is practical for consumer bills to be reduced by £300 by the end of the Parliament. To examine this question we need to look at the full cost of subsidies and other costs being incurred to decarbonise the grid.

There are three subsidy schemes supporting renewables. The first is Renewables Obligations (RO). Renewables generators are awarded certificates for each unit of electricity generated in addition to the market price they receive for their output. Accordingly, electricity from these generators will always be more expensive than market rates, often set by gas. Even though this scheme is closed to new participants, the OBR (October 2024 detailed forecast tables: receipts) shows us the RO scheme cost £7.6bn in 2023-24 and the cost is forecast to rise to £8.5bn in 2026-27.

The second scheme is Feed-in-Tariffs (FiT), paid mostly to small solar installations. FiT generators are paid a fixed amount to generate electricity plus a smaller amount for the power they export (or are deemed to export) to the grid. Again, this scheme is closed to new entrants, however analysis of Ofgem’s latest report into the FiT scheme shows it cost nearly £1.9bn in 2023-24, or around £221/MWh which is nearly three times higher than market rates today (7^th March 2025) of about £82/MWh. We might expect the cost of the FiT scheme to continue to rise in line with inflation.

Finally we have the Contract for Difference (CfD) scheme used for the now annual renewables auctions. Here, generators receive a fixed amount for the power they generate. They receive the market value for their power and are then paid a top-up to the strike price of their contract. If market prices are above the strike price, they must pay back the difference. Analysis of data published by the Low Carbon Contract Company shows the CfD scheme cost a record £2.4bn in subsidies during calendar year 2024. During the energy crisis of 2022, CfD generators paid back a net amount of about £346m. During 2024, CfD-funded offshore wind generators cost about £154/MWh and received more than half their revenue from subsidies. As more CfD generators come online, we might expect the cost of subsidies to rise as the indexation of existing contracts overwhelms the lower prices of some new developments.

The total cost of these subsidy schemes amounts to nearly £12bn per year or the equivalent of over £420 per household per year and as we have seen we can expect these costs to continue to rise, putting upward pressure on bills.

However, subsidies do not represent the full cost of renewables. First, because wind and solar are intermittent their output can fluctuate significantly so that sometimes they produce less than expected and at other times can produce more than demand or more than the grid can handle. Therefore, the grid needs to be balanced, usually using gas-fired generators. NESO produce Monthly Balancing Services Summary reports and the data for 2023/24 shows the cost of this service was £2.54bn. In addition, we pay for backup through the capacity market and the OBR shows this cost us £1bn in 2023/24 and the costs are forecast 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.

Wind and solar farms tend to be sited away from the source of demand, so we need to spend even more money to expand the electricity network to connect them to the grid. NESO have announced £54bn of spending on grid infrastructure to 2030 and a further £58bn to 2035, making a total spend of £112bn. If we assume an 8% cost of capital and 2% operations and maintenance costs, the annual costs on energy bills will amount to about £11bn once the investment is complete, or the equivalent of another £385 per household.

However, these announcements were made before the Clean Power 2030 (CP2030) plan was announced. NESO estimated this would cost £44-48bn per year to the end of 2030, or a total of £264-290bn over the six-year period. According to the Digest of UK Energy Statistics (DUKES) we used 205.7TWh of gas to produce 101.7TWh of electricity in 2023. Using recent elevated gas prices of 120p/therm, this gas would have cost us £8.4bn. The CP2030 plan would eliminate much of this gas giving a saving of around £7.2bn per year. However, 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 around four times the projected savings on gas. Adopting the CP2030 plan will increase our energy bills by £900-1,000 per household, even if gas prices stay at the current elevated level. This simple analysis is backed up by recent work by Professor Gordon Hughes who concluded the Clean Power 2030 plan would add £900 to energy bills. Additional costs are in the pipeline from subsidies for Carbon Capture and Storage (CCS) and hydrogen.

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, or about 18% of today’s electricity spot price. The CP2030 plan anticipates carbon prices rising substantially to around £147 per tonne, adding further upward pressure on energy bills.

This analysis maybe surprising to some because of the misinformation promulgated by the Commons Library, the BBC and others who claim that renewables are cheap. Their analysis focuses on the low marginal costs of generation for wind and solar. While this is true, the misinformation arises because their analyses do not consider the full system cost of subsidies, grid balancing and backup nor the extra costs of new electricity transmission and distribution lines. As we saw above, these extra costs are considerable and will have an ever-increasing impact on energy bills.

Given this backdrop, we can now turn to question two that asks how consumers can be insulated from inflated prices caused by gas price shocks. We should note first that ESNZ should correctly diagnose the problem before prescribing solutions. This framing of the question is an inversion of reality – the real source of high energy bills is the cost of the energy transition to unreliable renewables. Question two needs to be re-framed to ask how consumer bills will be insulated from the ever-increasing cost of renewables and brought down to competitive levels. If ESNZ really wants to consider how energy bills can be reduced, then the following measures should be considered:

• Remove the carbon tax on gas-fired generation which will reduce the market price of electricity immediately and reduce the revenue received by RO-funded generators.

• Consider a windfall tax on renewables generators, with the proceeds applied to offset the subsidy costs in our bills.

• Cut the 5% VAT on energy bills, again immediately reducing bills.

• Stop any new subsidies for expensive and intermittent renewables and dramatically cut the planned spend on grid expansion.

• These measures may allow for the Warm Home Discount and Energy Company Obligation components of our energy bills to be cut, because there will be less need for them.

• Looking forward, energy strategy should focus on cheap, reliable energy with a small overall environmental footprint. This means a focus on reliable, concentrated power from large nuclear reactors on existing nuclear sites and SMRs on old coal-fired generator sites. This will reduce the need for grid extensions, saving money and reducing the impact on our wonderful scenery. The costs of grid balancing and backup will also fall. This will require a dramatic overhaul of nuclear regulation so we can cut the cost of building new plants by a factor of three or four to a similar level to Korea.

• Lift the ban on North Sea drilling and end the moratorium on fracking so that we can develop more of our own gas resources. Simple supply and demand economics will ensure that increased gas supply will reduce prices. This will improve our balance of payments, create good, unsubsidised jobs, improve energy security and have a smaller impact on the environment than importing LNG from the US or Qatar.

Now on to question three about where the cost of decarbonisation should lie. We should note first that no country has yet successfully decarbonised its grid. This will never be achieved using intermittent wind and solar because as we have seen, the costs are prohibitive. The only solution that can deliver lower emissions and a reliable grid is nuclear power. Until Generation IV reactors come online that can vary their output, the grid will require some gas power plants to manage the fluctuations in demand. This will not deliver a Net Zero grid, but emissions will be very much lower, the overall environmental footprint will be much smaller than any alternative and the grid will be more reliable. This approach should reduce overall costs compared to the current approach. Of course, any transition costs should be borne by consumers but the transition should not be forced at an unrealistic pace.

There is a hint in the inquiry preamble about transferring the cost of renewable electricity on to gas bills. It is obvious that simply moving charges from one bill on to another will not tackle the root cause of high energy bills. Moreover, if we follow the advice of the CCC and phase out gas, then the subsidies and other costs will need to be moved back on to electricity bills anyway. Any idea of transferring costs in this way should be dropped.

Reducing standing charges and loading some of the costs on to unit rates may well be less regressive than the current arrangements. However, it should be noted again that this will not alter the underlying problem of the high total cost of renewables, it will just change who pays these costs.

In summary, the UK’s high energy prices represent an existential threat to the economy. Before making recommendations on how to reduce energy bills, you need to correctly diagnose the problem and then select actions that will directly cut the costs of energy, not simply change the pocket that the bills are paid from.

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PDF of evidence submitted to the ESNZ Inquiry into the cost of energy:

Esnz Call For Evidence On Cost Of Energy David Turver

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