Homeowner Blog

Why Are Electricity Prices Rising?

George Riley 16 Apr 2020

Getting your latest electricity bill is rarely a fun experience, yet it seems to become ever more painful. 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 2019 in the UK:

Average electricity prices 2019

Data source: BEIS.

So the average cost of electricity in the UK is 16.6p per kWh as of 2019.

Are electricity prices rising?

Electricity prices have risen significantly in recent years. A standard electricity bill increased 6% from 2018 to 2019. While gas prices fluctuate (and have recently fallen), relative electricity costs have continued to rise:

UK fuel prices 1996 - 2019

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%).

Some of these components have been affected more than others by the green energy transition...

Why are electricity prices rising?

When clean energy supplier Bulb recently upped its charges, the company blamed it on rising network and policy costs. But if renewable costs have fallen dramatically over the last decade (to the point they’re now cheaper than fossil fuels), 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.

While this adds up to a significant proportion of our electricity bills, decarbonising the grid is an essential part of avoiding climate breakdown.

How can you protect yourself against rising electricity prices?

In his 2018 report, Professor Dieter Helm recommended actions such as a uniform carbon price and selling off old, expensive renewables contracts to address rising prices. In the absence of such significant changes, we are likely to be stuck with escalating prices for the foreseeable future.

So how can you insulate yourself from further price hikes? The simplest (and greenest) 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 8p/kWh - far lower than the 16p/kWh average for the grid, which as we’ve seen is going up and up and up…

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

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