Why Is My Energy Bill So High?

And what to do about it.

Introduction

Eagle-eyed readers will have noticed the footnote at the bottom of recent articles announcing that I will be speaking at the Battle of Ideas on October 18^th in the debate entitled “Why is my energy bill so high?”. This article summarises the facts and figures from other recent articles and covers what I would like to say in that debate. If you are interested in coming along, you can get 20% off any ticket price by clicking on this link.

Tol illustrate why our energy bills are so high we will examine the following areas:

• Role of Gas

• Carbon Taxes

• Renewables Subsidies

• Extra Costs of Renewables

• Other Policy Costs

We will then discuss what can be done to reduce energy bills.

Energy Prices in Context

The latest data from the IEA shows the UK had the highest industrial electricity prices in the world in 2024 and the second highest domestic electricity prices. Although our gas prices are competitive with continental Europe, they are still very high compared to key competitors like the USA and Canada. High energy prices represent an existential threat to the economy, so it is vital that we properly understand the causes of high prices so we can formulate the right policy responses.

Role of Gas

It is true that the cost of gas sets the wholesale electricity price most of the time. However, this is not the whole story. According to DUKES (Table 5.6A), in 2024 we used 178.8TWh of gas to produce electricity. According to TradingView, the average price of gas in 2024 was 89.67p/therm. Working through the arithmetic, this gas would have cost us £5.5bn. Remember that number when we start looking at the cost of renewables subsidies.

Carbon Taxes

The price of gas-fired electricity is inflated by the addition of carbon taxes in the form of the Carbon Price Support Mechanism (CPS) and the Emissions Trading Scheme (ETS), the latter is not strictly a Carbon Tax but nevertheless is an extra cost. As shown in Figure 1, Ember now produce an interesting chart breaking down the fuel costs and carbon costs of gas-fired electricity.

Figure 1 - Impact of Gas and Carbon Costs on Wholesale Electricity Prices

In August 2025, they estimate fuel costs of £54.67/MWh and carbon costs of £25.77/MWh or 32% of the total. The CPS is a straightforward Carbon Tax levied at £18 per tonne of carbon dioxide. The ETS cost varies and has been increasing recently from about £30/tCO2 in January to about £55/tCO2 today. The increase is due to the Labour Government announcing that the UK ETS will align with the EU scheme.

Removing these carbon costs would immediately reduce the wholesale price of electricity and bring down bills. A welcome side effect is that the revenue for renewables generators funded by Renewables Obligation Certificates (ROCs) would also be cut as they receive the wholesale price plus their certificates on top. Moreover, wind and solar farms operating on a merchant basis would also see a reduction in revenue, leading to an even bigger reduction in bills.

According to DESNZ statistics, the UK power sector emitted about 37.5MtCO2e in 2024. The CPS cost £18/t and the average carbon cost in the ETS was about £38/t, so the total added to our bills from these costs was about £2.1bn. Emissions are falling but ETS costs are rising, so it is difficult to say quite how this cost would move in the future. For the average electricity bill of 2,700kWh, the annual saving would be about £70 at current carbon prices.

Renewables Subsidies

Renewables are subsidised by three subsidy schemes: Renewable Obligations Certificates (ROCs), Contracts for Difference (CfDs) and Feed-in-Tariffs (FiTs).

ROC-funded 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 (March 2025 detailed forecast tables: receipts) shows us the RO scheme cost £7.8bn in 2024-25 and the cost is forecast to rise to £8.5bn in 2026-27.

Feed-in-Tariffs (FiT) are 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 (13th October 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. The cost of this scheme is likely to rise, considering the high prices being offered on new 20-year index-linked contracts in the current Allocation Round 7 (AR7) auction of new capacity.

All prices are much higher than the current price of gas-fired electricity unencumbered by carbon costs.

The total cost of these subsidy schemes amounts to nearly £12bn per year or more than twice the amount spent on gas for electricity. In the latest Ofgem price cap, ROCs add over £89 to our electricity bills, CfDs more than £35 and FiTs over £19, for a total of almost £144 for a typical household using 2,700kWh of electricity per year. This amounts to about 17% of the ex-VAT total electricity bill of £840.

Extra Costs of Renewables

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. At these times we pay wind farms to curtail their output. The grid needs to be always balanced so we also pay gas generators to fire up to compensate. NESO produce Monthly Balancing Services Summary reports and the data for 2024/25 shows the cost of this service was £2.7bn. In addition, we pay for backup through the capacity market and the OBR shows this cost us £1.3bn in 2024/25. Grid balancing adds about £54 to the typical electricity bill and the Capacity Market adds about £27.

NESO forecasts balancing costs to rise to £6.4-£8.3bn by 2030 and OBR forecasts Capacity Market costs to rise to £4bn per year in 2027/28. We can therefore expect these extra costs of renewables to rise to £10-12bn by 2030, again roughly twice the current cost of gas used for electricity.

In addition, because renewables are geographically dispersed, they need extra spending on transmission lines to connect them to the grid. Ofgem has recently approved an initial £8.9bn of spending on the high-voltage electricity network. They claim this is the first step of an £80bn programme to boost the electricity network capacity. They estimate this will add a further £74 to electricity bills.

Other Policy Costs

All these costs of renewables make electricity extremely expensive, particularly for the poorest households, so the Government has introduced schemes like the Warm Homes Discount (WHD) and the Energy Company Obligation (ECO) to try to help. WHD provides a £150 discount for the poorest households and ECO obliges energy companies to install insulation measures to some homes. The cost of these schemes is paid for by everyone else and together these add about £34 to electricity bills.

If electricity prices were lower, these schemes would be largely unnecessary and the cost of supporting the poorest would fall dramatically. The ECO has a 98% failure rate for external insulation so should be scrapped anyway.

How to Reduce Bills

As previously mentioned discussed, the high cost of energy means we face a version of the Trolley Problem. This is where you face a dilemma of whether to divert a runaway trolley bus to kill one person instead of five. In our version of the problem we must sacrifice either society or the green blob.

Figure 2 - Green Energy Trolley Problem

If we continue down the current Net Zero path, our economy and wider society faces an existential threat from high energy prices. We must face the unpalatable truth that moving onto the path to prosperity will require measures that will be painful for some, most notably what can be loosely termed the green blob.

The Reform Party has committed to end Net Zero and the Tories have recently pledged to repeal the Climate Change Act, disband the Climate Change Committee, eliminate carbon costs and end ROCs early. These new Tory policies reflect some of the ideas discussed in earlier articles. Reform have committed to striking down any contracts agreed in the current Allocation Round 7 (AR7) auction of new renewables capacity.

If the government has an epiphany about energy costs, they could also consider cutting VAT on energy bills, delivering an immediate cut of 5%. Other measures could be considered including cutting curtailment charges and ending the spending n grid expansion.

Taken together, these measures would reduce energy bills, meaning the WHD and ECO could also be cut, reducing bills further.

On the supply side, the Energy Profits Levy on oil and gas producers should be cut and the ban on offshore and onshore drilling should also be lifted. Increasing supply ought to reduce prices and of course we might also earn export revenues. In the medium term we need to build more gas-fired generators and massively expand out nuclear fleet after streamlining nuclear regulations.

Conclusions

We face an existential crisis from high energy prices. The Net Zero project should be abandoned and be replaced by a project with the sole aim of delivering cheap and abundant energy. There are many measures that could be taken in the short term to cut bills. Fixing the supply side will take longer and work on that should start now.

It is encouraging that opposition parties have started to challenge the Net Zero orthodoxy. The Green Blob should be left in no doubt that the trolley bus has been diverted and it is coming for them. Time to get out of the way.

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I have been invited to speak at the Battle of Ideas Festival in October on the subject of “Why is my energy bill so high?” You can get 20% off any ticket price by clicking on this link.