Wholesale gas costs blamed for rises in household energy bills
New analysis has found that wholesale gas prices are responsible for two-thirds of the electricity bill increases households have faced in recent years.
An assessment by independent analysts at the UK Energy Research Center (UKERC) found that typical electricity bills rose by £169 in real terms between 2021 and 2025, a period when energy costs rose following Russia’s invasion of Ukraine.
UKERC analysis found 66 per cent of the increase between 2021 and 2025 was due to rising wholesale gas prices.
17 percent were linked to increased network costs; 13 percent were due to policy costs, including those designed to support renewable energy initiatives.
Although gas accounts for only one-third of electricity generation, the price of natural gas is estimated to increase the cost of electricity by up to 90 percent of generation, exposing ratepayers to gas price shocks.
While energy prices have stabilized somewhat since the peak of the crisis in 2022-23, the government continues to face pressure from high bills.
This comes amid claims by some political opponents that ‘net zero’ policies aimed at reducing fossil fuel use are overburdening consumers.
This will change as more renewable energy projects, such as offshore wind farms, come online with prices fixed under a “contracts for difference” (CfD) scheme, with gas expected to determine the price of electricity by only 60 percent within three years, the assessment said.
The analysis suggests this would reduce wholesale electricity prices by about 8 percent by 2029.
In last year’s budget the Government moved to cut bills by an average of around £150 a year by scrapping a pioneering energy efficiency scheme that put costs on consumer bills and moved the cost of old renewable energy subsidies off bills and into general taxation; This will help households from April onwards.
But UKERC said the Government and consumers could make further savings by shifting older renewable generators to the fixed-price CfD regime, whose subsidies are paid in addition to the wholesale cost of electricity.
This could lead to savings of between £2bn and £8bn a year by the late 2020s, benefiting the Treasury, households and business customers, the study said.
UKERC director Professor Rob Gross said: “We are at a strange moment in the UK energy transition.
“Although policies encourage the implementation of renewable and nuclear projects that will ensure stable prices in the long term, unpredictable global gas prices still dominate our energy market.
“The government is rightly committed to reducing dependence on volatile fossil fuels.
“UKERC is looking for options to accelerate benefits, which is why we are advocating for a new contract for legacy renewables.
“Like a fixed-price mortgage, this can help provide predictable prices for both households and businesses.”
UKERC’s annual energy policy review also warns that action is needed to roll out smart meters and half-hourly meters so consumers can gain cost savings from flexible tariffs for electric vehicle charging, heat pumps and smart devices.
It also warns that the move away from gas must be managed to avoid high costs for vulnerable customers remaining on the gas network as other households switch to clean heating and cooking and consumption falls.
Currently £4bn of capital investment costs for the gas network are planned to be clawed back from customers after 2050, when net zero plans will mean no customers left on the network and it will cost billions of dollars more to disconnect customers and secure the network from abandonment.
Warning that the state “will have to bail out the gas industry one way or another”, the report calls for a wide-ranging debate on the future of the network and suggests options such as disinvestment, a planned area-by-area approach to retirement and even nationalization.
