UK Electricity Prices Skyrocket as Iran War Disrupts Gas Supplies
Electricity wholesale prices in the United Kingdom have surged by more than double since the conflict in Iran triggered a severe global squeeze on seaborne gas shipments from the Gulf. This dramatic increase has reignited urgent questions about Britain's grid strategy and its position as one of the world's most expensive electricity markets.
Despite a growing share of domestically generated renewable power, the UK's heavy reliance on gas has left it vulnerable to international market fluctuations. In response, the Treasury has introduced measures aimed at weakening the link between electricity generation and volatile gas markets, seeking to stabilise costs for consumers and businesses.
How Dependent Is the UK on Gas for Energy?
The UK remains highly reliant on gas, which accounts for approximately one-third of the primary energy used across the entire economy. This includes around 23 million gas boilers, used by about 85% of households for heating and hot water. Additionally, gas power plants generate nearly 30% of the country's electricity.
Almost 80% of the UK's gas supply comes from North Sea pipelines, sourced from the declining UK oil and gas basin or Norwegian waters. The remainder is met by liquified natural gas (LNG) tankers from countries like the United States, along with withdrawals from storage. Notably, the Gulf contributes surprisingly little, with Qatar accounting for just 1% last year.
The core issue is that wholesale prices have soared because the market price is set by the most expensive source of gas available. This dynamic results in windfall profits for suppliers like Norway and higher costs for the UK, despite a diverse range of gas sources.
Why Don't Renewables Lead to Cheaper Electricity in the UK?
Similar to gas markets, the electricity market price in the UK is determined by the most expensive source of available power generation. More often than not, this is the cost of operating gas plants, which sets the price for the entire system.
This mechanism, known as marginal pricing, can be likened to a football penalty shootout, as suggested by the supplier Good Energy. Low-cost renewables are selected first, but when demand peaks, gas steps in to set the final score. In 2023, gas set the electricity market price 98% of the time in the UK, the highest rate in Europe and well above the EU average of just under 40%.
Countries like France, with abundant nuclear power, and Spain, with a virtually all-renewable grid, manage to keep gas demand and prices lower. While the UK's rapid rollout of renewable energy has helped, experts estimate it may take until at least the end of the decade for renewables to meaningfully impact overall market prices.
What Actions Is the UK Government Taking?
Government officials are urging older renewable energy projects, currently under the legacy Renewables Obligation (RO) subsidy scheme, to transition to fixed-price contracts similar to those used by newer projects. This move would affect about 35GW of capacity, or 30% of the UK's total generating capacity.
If these projects adopt fixed contracts, it could weaken the link between soaring wholesale gas prices and electricity costs. The government anticipates that the influence of gas markets will diminish in the coming decades as new renewable projects under fixed contracts are deployed and legacy deals expire. Accelerating this shift could deliver more stable electricity costs sooner.
Legacy renewables companies that refuse to sign new contracts will face higher taxes from 1 July. Chancellor Rachel Reeves plans to increase the windfall tax on excess profits made by electricity generators in Great Britain from 45% to 55%, with proceeds directed to support households struggling with bills.
Chris Hayes, chief economist at the Common Wealth thinktank, argues there is a strong case for removing gas plants from the electricity market and placing them in a strategic reserve, where they would operate only as a last resort at a fixed price.
What Impact Will This Have on Household Bills?
The government's cap on household energy bills is projected to rise to £1,836.84 for the typical annual dual-fuel bill, according to forecaster Cornwall Insight. The measures announced are unlikely to alter this projection immediately, and the government has not detailed how windfall tax proceeds will aid households and businesses.
Implementing the plan to push more generators onto fixed contracts may take time. The government has launched a consultation but must be cautious to avoid locking in high market prices. In the interim, ministers are focusing on making low-carbon energy options more accessible.
Legislation expected this summer will allow households to install pavement gullies outside their homes for running cables to charge electric vehicles without planning permission. This aims to enhance convenience and affordability for drivers without off-street parking. Additionally, the government hopes to accelerate solar power uptake through plug-in solar systems to help lower bills.
