Why Britain pays more for electricity

Why Britain pays more for electricity

UK electricity prices are among the highest for developed economies. The UK’s reliance on gas to generate electricity meant prices surged following Russia’s invasion of Ukraine. Despite falling back from the 2022 peak, electricity prices are currently more than 50% higher than before the invasion. High energy prices have squeezed households and created huge challenges for energy-intensive businesses.

• In 2023, the UK had the highest industrial electricity prices among 24 members of the International Energy Agency (IEA), a group of developed economies. UK firms paid around 50% more for electricity than German and French competitors, and four times as much as companies in the US. India and China are not members of the IEA, but data for 2024 shows UK firms pay around three times as much for electricity as those in India and China.

• Raine Newton-Smith, head of the Confederation of British Industry, said recently that 40% of UK firms were holding back on investment due to high energy bills. Earlier this year Jim Ratcliffe, owner of the petrochemicals group Ineos, said energy prices were killing the UK’s chemical industry.

• Energy-intensive industries, mainly operating in international markets, include paper products, petrochemicals, metals and inorganic products such as cement, ceramics and glass. In the UK, the combined output of these sectors has fallen by one-third since 2021 and is now at its lowest level since data started to be collected in 1990. It’s not just the UK. The European Central Bank reports that euro area manufacturers are increasingly relying on imports, rather than domestic production, for energy-intensive intermediate goods.

• US electricity prices are low partly because of America’s abundant domestic supply of cheap gas. The same cannot be said for France or Germany, which, like the UK, import fossil fuels. The UK’s unusually heavy dependence on gas helps explain why UK industry and consumers pay more for electricity than those in France and Germany.

• In 2024, gas accounted for 30% of UK electricity generation, 16% in Germany and just 3% in France. Germany has a diversified mix of energy generation, with more than two-thirds coming from coal, solar and wind. France generates almost 70% of its electricity from nuclear.

• EU members produce on average almost 50% more electricity than the UK on a per capita basis. Sweden and Finland are the leaders, with the lowest prices among the EU and by far the highest per capita electricity generation.  These countries combine renewables and nuclear to generate around four times as much electricity per person as the UK.

• The UK’s reliance on gas means it is often expensive gas that sets the price for all electricity due to Britain’s system of marginal pricing. The final unit of supply needed to meet demand sets the price for all electricity sold. So even if 99% of demand is met with cheaper low-carbon energy, the gas plant that is required for the last 1% will set the price. In 2021 gas power stations accounted for 43% of UK electricity output but set the system price 97% of the time. In comparison, gas sets the marginal price for electricity in the EU 36% of the time. In France, with its huge nuclear capacity, gas sets the price only 7% of the time.

• Policies designed to encourage decarbonisation have also added to electricity prices – though this effect is dwarfed by the impact of higher gas prices. The renewables obligations, the feed-in tariffs and the climate change levy collectively account for about 10% of industrial users’ electricity bills. Fewer exemptions are available from these levies than for comparable schemes in Germany, France and the Netherlands.

• In the UK, all electricity-related costs are included in the customer bill. In other countries some components — mostly policy — are paid through general taxation. This applies both to domestic and industrial energy prices.

• Renewables accounted for just over half of all UK electricity production last year, up from 2.5% in 2000. At the same time, the cost of renewable energy technology, such as solar panels, has fallen precipitously. So if the UK technology is getting cheaper and the UK is producing more green electricity, why aren’t bills lower?

• A number of factors are at work. First, consumers and industry are still paying for renewables that came online several years ago when costs were higher. Under the contracts for difference system, operating since 2014, each vintage of contract guarantees energy suppliers a ‘strike price’ for the next 15 years; earlier strike prices, set up to nine years ago, at a time when costs and risks were greater, were higher than more recent ones. Second, land, labour and capital account are major costs for renewable producers, and, unlike green technology, they’ve risen in price. Third, and most obviously, solar and wind are subject to the vagaries of the weather and are frequently offline. Renewables need backup capacity, storage, transmission and system balancing, the costs of which are added to bills.

• The government recently set out measures to reduce costs for some industrial users of electricity. Next year the government plans to reduce electricity network charges for industrial businesses and in 2027 it will exempt about 7,000 energy-intensive businesses from some green levies.

• Such measures are palliatives, not a cure since they shift the incidence of higher electricity costs to other energy consumers or to taxpayers. Gas prices could, of course, fall further and, in the meantime, the technology for renewables and battery storage is getting cheaper. Other costs, however, continue to rise while a huge programme of investment in Britain’s energy system lies ahead. Renewables offer the ultimate prospect of cheap, secure energy. Getting there will take time and a lot of capital.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.4% at 9,120. The index hit a record high earlier in the week amid increasing optimism that the US would strike agreements with its major trading partners.

Economics

• The US and Japan agreed a trade deal that will see tariffs of 15% on Japanese goods including cars imported into the US, higher than the 10% interim tariff
• The US and EU are reportedly close to a similar deal, however the EU has readied a package of retaliatory tariffs of up to 30% should an agreement not be reached
• Early estimates of business activity in July from surveys of purchasing managers suggest an acceleration in growth in the UK, US and euro area despite declining manufacturing activity
• US president Donald Trump called Fed chair Jay Powell a “numbskull” for not cutting interest rates and very publicly criticised the cost of refurbishing the Fed’s headquarters in Washington before saying that firing Mr Powell would not be “necessary”
• The European Central Bank kept its benchmark interest rate on hold at 2% with president Christine Lagarde saying the bank was in a “wait-and-watch situation”
• The UK and India signed their previously announced trade deal following last-minute talks on some of the details, including automotive tariffs
• UK retail sales volumes rose by a less-than-expected 0.9% in June following a 2.8% contraction in May
• Further evidence of UK consumer caution comes from a survey by GfK that found that consumers are more likely to say that now is a “good time to save” than at any point since November 2007
• The UK government launched a review of the state pension age that is set to start rising to 67 from next year and 68 from 2044
• The UK government borrowed a greater-than-expected £20.7bn in June, adding to speculation that taxes may have to rise in the Autumn Budget
• Tens of thousands of preschools are closing down in China where the annual number of births has nearly halved since 2016

Business

• The UK prime minister Keir Starmer and health secretary Wes Streeting criticised a five-day strike by resident (formerly junior) doctors over pay with the latter saying it “enormously undermines the entire trade union movement”. The British Medical Association union is seeking a 29% pay rise following a 22% settlement over two years agreed last year
• The UK government announced it would scrap and replace water regulator Ofwat following a review by former Bank of England governor Sir Jon Cunliffe
• US carmaker General Motors and German carmaker Volkswagen both announced a fall in operating profit in the second quarter as US tariffs on car imports caused difficulties on both sides of the Atlantic
• The number of recorded shoplifting incidents in the UK rose 20% in the year to the end of March, the highest since comparable data began in 2003
• The $8bn merger between Paramount Global and Skydance Media was approved by US regulators
• Private equity groups are making record use of ‘continuation funds’, where assets are effectively sold to themselves, amid a continued drought in IPOs and deal activity, the FT reports
• Tom Hayes, a banker jailed over the Libor rigging scandal, had his conviction overturned
• The UK and Turkey signed a preliminary agreement to sell Eurofighter Typhoon jets to Turkey
• The UK gave the final approval for the Sizewell C nuclear project despite a near-doubling in estimated cost to £38bn

Global and political developments

• French president Emmanuel Macron said that France would recognise a Palestinian state at the UN in September, increasing pressure on the UK to do the same
• UK prime minister Keir Starmer is expected to meet US president Donald Trump during his five-day golf trip to Scotland with steel tariffs expected to be a key topic of discussion
• Former Labour leader and now independent MP Jeremy Corbyn announced he was setting up a new party together with former Labour MP Zarah Sultana
• Acting Thai prime minister Phumtham Wechayachai warned that border clashes between Thailand and Cambodia that include heavy weapons and have killed at least 16 people have the potential to “move towards war”
• Ukrainian president Volodymyr Zelenskyy scrapped planned reforms to the independence of the country’s anti-corruption institutions following protests
• UK Conservative Party leader Kemi Badenoch reshuffled her shadow cabinet and appointed former leadership rival Sir James Cleverly as shadow housing secretary
• Talks resumed between Iran and the UK, France and Germany ahead of a deadline to reimpose sanctions on Iran if a deal is not reached over its nuclear programme

And finally… queues built up as a road in Asheville, North Carolina, was closed to allow workmen to clear up a spilled cargo of toothpaste - brush hour traffic