Homeowner Blog

Why Are Electricity Prices Rising?

George Riley · 27 Oct 2021

Getting your latest electricity bill is rarely a fun experience, yet it seems to become ever more painful. With wholesale prices soaring, the energy industry is in turmoil and we will all end up bearing the financial brunt.

On top of this, the national grid has undergone a huge transformation in the past decade from coal-heavy to embracing wind and solar, the costs of which have crashed. So there’s a logical disconnect - why are electricity prices rising if renewables are getting cheaper?

What is the average cost of electricity?

Your electricity bill will be made up of the price per unit of electricity used (pence/kWh) and the daily standing charge (in simple terms used to cover the cost of running the network).

The price per unit of electricity varies across the country, supplier and tariff. Here are the average unit prices for 2021 in the UK:

Average electricity prices 2021

Data source: BEIS.

So the average cost of electricity in the UK is 18.5p per kWh as of 2021. With the current wholesale price turbulence, this is likely to increase significantly in the coming months. Some fixed tariffs at the time of writing were quoting double this unit price...

Are electricity prices rising?

Electricity prices have risen significantly in recent years. A standard electricity bill increased 9% from Q2 2020 to Q2 2021. While gas prices fluctuate (and had been falling until the recent crisis), relative electricity costs have continued to rise:

UK fuel prices 1996 - June 2021 (relative to GDP deflator)

Source: BEIS.

What makes up your electricity bill?

Perhaps surprisingly, the margin that suppliers make on electricity is tiny:

Electricity bill breakdown

Data source: Ofgem.

The supplier profit margin is approximately 1%. The rest of the bill covers:

  • Wholesale costs (32%) - the energy your supplier buys (often in advance).
  • Network costs (23%) - network operators maintain the transmission of electricity to your home.
  • Operating costs (17%) - customer service and IT.
  • Environmental and social obligation costs (20%) - FiT, warm home discount, Energy Company Obligation etc.
  • VAT (5%).

The energy crisis

You won’t have missed the energy issues that have gripped Britain this autumn and threaten to stay for the winter. Global supply and demand issues have caused wholesale gas prices to spike, which has squeezed the tight margins of our energy suppliers to breaking point. Since about 40% of electricity is generated by burning gas, both fuel costs are rising. Small suppliers have fallen like dominoes and even big companies will find the coming winter a challenge.

Some have removed the option to switch to them online and experts recommend sticking with your current supplier over winter. If your fixed tariff runs out, it will probably be better to go onto the price-capped default tariff than choose a new fixed one. (This is because Ofgem set the price cap a few months back, before wholesale prices surged so much.)

Fixed tariffs are already shooting up in cost, and the next price cap in April is likely to reach record levels (with a potential rise of about 30%) once this crisis is fully taken into account.

Why are electricity prices rising?

Even before the recent surge, electricity prices were inflating year-on-year. But renewable costs have fallen dramatically over the last decade (to the point they’re now cheaper than fossil fuels), so why have electricity bills continued to rise?

The cost of new renewable generation systems has dropped. Installations have been subsidised, prices have come down through efficiency, scale and experience, and the operating costs are marginal compared to fossil fuel plants (‘fuels’ like solar and wind are free). But the wholesale generation cost is only a proportion of the price consumers pay (see above).

Our energy system used to be simple: big, centralised power stations producing a constant supply to many consumers. But now we have many decentralised generators, producing energy when the sun shines or the wind blows. Power flows both to and from consumers (when they own solar panels). The variable and intermittent nature of renewables requires investment in technology to counterbalance that variance in frequency. They also need to be situated in optimal locations, which can result in new transmission infrastructure stretching over longer distances.

Part of the cost of the UK’s renewable supply is legacy - the price agreed for previous generators when they were brought online (at much higher rates than the present). We also have to pay for subsidies like the Feed-in Tariff and Renewable Heat Incentive. Bundled together, these ‘green levies’ have built up year-on-year:

Levies on power generation

Data source: BEIS.

How can you protect yourself against rising electricity prices?

How can you insulate yourself from further price hikes? The simplest way is by investing in solar PV and battery storage. Effectively, you’re buying 25+ years of electricity upfront at a fixed cost. The lifetime cost of solar energy currently works out at 9p/kWh - far lower than the 23.72p/kWh average for the grid, which as we’ve seen is going up and up and up… Over the lifespan of the PV system, we estimate grid electricity to cost an average of 45p/kWh.

To find out more, please give us a call on 0118 951 4490 or download our free guide to residential solar:

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Topics: Battery storage, Solar PV