The Cost of Electricity in the UK: Drivers, Challenges and Opportunities for Reform

With the UK facing its second energy crisis in five years, debate around how to reform domestic electricity prices is back in full force. The high cost of power, exacerbated by international conflict, adds to the cost-of-living crisis and makes the planned electrification of heating and transport more challenging.  

This UKERC Briefing Paper provides an analysis of the drivers behind high electricity bills, the expected trajectory of bill components through 2030, and the policy and market reforms that could meaningfully reduce costs for UK households. It draws on a decade of Ofgem energy price data, original UKERC analysis, expert workshop findings, and a wide body of grey and academic literature. It lays a foundation for our subsequent work to explore specific options and a package of reforms.  

Drivers of High Electricity Bills

Over the last decade, average annual domestic electricity bills have grown in real terms from £643 to £968, driven by wholesale, network, operating and policy costs. Gas-linked wholesale prices have been the most volatile component, spiking by 381% between 2021 and 2023 following Russia’s invasion of Ukraine. While government moved a proportion of policy costs from electricity bills to general taxation in April 2026, delivering a reduction of approximately £100 per household, the escalating conflict in the Persian Gulf has already overwhelmed much of this progress.  

The cost of power in the next few years will be driven by substantial investments in maintaining and expanding networks. Network costs are set to rise in the short to medium-term, but wholesale costs are expected to fall with increasing renewable energy capacity under a fixed price contract.  

High gas dependence, low gas storage and the strong link between gas and electricity prices make both gas and electricity bills in the UK particularly vulnerable to fossil fuel price volatility. Individual fossil fuel energy crises each have the potential to be more expensive for the UK than the transition to net zero by 2050. New approaches to reducing energy bills are needed which are cost-effective, compatible with clean power goals and address the acute pressures from energy crises.  

Key Reforms

While there will inevitably be social and political choices needed to manage trade-offs when designing reforms, several potential areas of focus emerge for reducing electricity bills in the UK: The influence of gas on electricity prices is already weakening and will be further aided by recently announced Government plans. However, more ambitious proposals that come closer to UKERC’s Pot Zero plan could deliver substantially greater reductions.  

1. Rising system costs driven by constraint and curtailment are another area requiring urgent attention. Reform is already underway, but it is important to improve the operational efficiency of the Balancing Mechanism, introduce lower thresholds for participation, and introduce constraint markets.  
2. More immediate bill reductions are likely to be achieved through changes to how bills are structured and taxed. Shifting remaining policy costs into general taxation could reduce bills by as much as 10%.  
3. As fixed costs are expected to continue rising, a tiered standing charge could offer a more progressive and publicly acceptable approach to cost recovery.  
4. Stronger consumer-led flexibility would reduce whole-system costs for all bill-payers, while also delivering direct savings for those households able to shift their demand.  
5. Accelerating electrification offers an opportunity to spread fixed costs across growing demand for electricity. Wider adoption of heat pumps and electric vehicles would be supported by action to reduce the price of electricity relative to gas.  

Most of the UK public still supports the push to renewable energy and net zero, but the number in favour of the 2050 timeline for net zero has weakened in recent years. This suggests that a key challenge for policymakers and expert commentators alike is to communicate effectively and transparently explain the drivers of bills and the trade-offs inherent to the energy transition.