There is some good news coming for your electricity bill next week. From 1 October the government is temporarily abolishing the 5% VAT charged on domestic electricity. The Treasury reckons that will save the average household about £45 a year.
Unfortunately, on precisely the same day, the energy price cap is going up. From October the typical dual-fuel household paying by direct debit will see the cap rise from £1,663 to £1,723, an increase of 4%. The average electricity unit rate will barely change, from 26.11p to 26.32p per kWh, partly because VAT has disappeared. Gas, which will continue to attract 5% VAT, rises from 7.33p to 7.97p. Ofgem says the increase reflects higher wholesale gas prices caused by global events.
There is something almost beautifully illustrative about this. The government has deliberately made electricity cheaper by removing a tax from it. But Britain remains so exposed to the international price of gas that much of the benefit disappears before anybody receives their bill.
It is a small example of a much bigger problem.
Britain has very expensive electricity. And it didn’t used to.
In the early years of this century British households enjoyed some of the cheapest electricity in Western Europe. In 2004 UK household electricity prices were the second lowest among the old EU15 countries. That world has disappeared. By the second half of 2025 British household electricity prices were 18% above the EU average and higher than all but three EU countries. British gas prices, curiously, were 34% below the EU average.
For British industry the position is considerably worse. Britain now has some of the highest industrial electricity prices among comparable developed economies. The gap between us and countries such as France and Germany has widened dramatically over the past decade.
Something has gone wrong. The obvious explanation would be that electricity has simply become more expensive to produce in Britain.
Except it hasn’t.
Price isn’t cost
Over the past twenty years Britain has completely transformed the way it generates electricity. Coal has virtually disappeared. Wind and solar have expanded enormously. Renewables generated about 16% of British electricity in 2015; by 2025 they generated 44%, with wind becoming our largest source of electricity.
At the same time, the cost of renewable generation has fallen dramatically. The government’s latest estimates put the lifetime cost of electricity from a new onshore wind farm at around £58 per MWh and large-scale solar at about £60. New gas-fired generation comes in at around £111.
Britain therefore doesn’t appear to have a fundamental problem producing electricity cheaply. The Green tranisition has given the UK lots of cheap electricity
Instead it has a problem turning relatively inexpensive electricity into inexpensive electricity bills.
Price isn’t the same thing as cost. There is the cost of generating electricity. There is the wholesale price at which electricity is traded. There are the costs of transporting it around the country and balancing supply and demand. There are the costs of government energy policies. And finally there are taxes. Only after all of those have been added together do we arrive at the price paid by a household or factory.
Britain has constructed that journey very differently from some of its competitors.
We built this market
The British electricity market isn’t a natural phenomenon. Governments created it. Until 1990 electricity in England and Wales was essentially a vertically integrated public industry. The Thatcher government broke it up and privatised it. Electricity generation became competitive while transmission and distribution became regulated private monopolies.
The original Electricity Pool used marginal pricing. Generators offered electricity into the market and the most expensive generator required to satisfy demand helped determine the market price. That wasn’t necessarily a disastrous arrangement in the world in which it was created. Indeed, electricity prices initially fell.
Britain was entering the great dash for gas. North Sea gas was plentiful, combined-cycle gas turbines were relatively cheap and efficient, and gas-fired power stations could be built quickly. But the electricity system we have today bears remarkably little resemblance to the one for which that market was designed.
Coal has disappeared. North Sea production has declined. Much of the old nuclear fleet has closed. Britain has built enormous quantities of renewable generation, particularly offshore wind. Yet gas remains important because somebody still has to produce electricity when renewable generation cannot meet demand.
That has an extraordinary consequence. In 2021 gas generated only around 40% of British electricity, but gas-fired generators were setting the marginal price in an estimated 97% of half-hour periods.
In France the equivalent figure was just 7%.
Then the price of gas exploded. Britain had created an electricity system in which the cost of producing an increasing proportion of our electricity was falling while the wholesale price remained extraordinarily sensitive to the price of a fossil fuel we were gradually using less of.
But that is only half the story.
Where you put the bill matters
Decarbonising Britain’s electricity system has cost a lot of money. Wind farms had to be encouraged and financed. The grid has had to be expanded. Renewable generators have been guaranteed prices. Energy-efficiency programmes have been funded. Backup generating capacity has to be available when renewable generation is low.
None of this is free. But there is a question which often disappears when electricity prices are compared internationally.
Who pays?
Britain historically chose to recover a significant proportion of the costs of decarbonisation through levies on energy bills, particularly electricity. Other countries have often made different choices.
Germany provides a particularly neat example. It used to finance renewable support through the EEG surcharge on electricity consumers. In 2022 it abolished that surcharge and moved the cost into the federal finances. The renewable generators didn’t suddenly become free. German electricity consumers simply began paying more of the cost as taxpayers rather than electricity customers.
Britain is now doing something similar. Since April the Exchequer has been paying 75% of the domestic cost of the Renewables Obligation rather than recovering it through electricity bills. Again, nothing has happened to the underlying cost.
It has moved from one column to another.
Some costs are easier to see than others
This produces another distortion in the way we talk about energy. Look at the price of British electricity and you can identify explicit costs associated with decarbonisation. Renewable support appears there. Network investment appears there. The cost of balancing the electricity system appears there.
That makes the cost of the transition highly visible.
Many of the costs associated with the energy system we are replacing are treated differently. Britain’s fossil-fuel industries have benefited historically from government support and tax reliefs. Some of the eventual cost of North Sea decommissioning is borne through reduced tax revenues. The environmental and health costs associated with burning fossil fuels don’t arrive as separate items on your gas bill, although carbon pricing does put some of those costs back onto fossil-fuel electricity generation.
The same accounting problem occurs when we compare Britain with other countries. If Britain finances £1 billion of renewable support through electricity bills while another country finances £1 billion through taxation, British electricity appears £1 billion more expensive. It doesn’t necessarily mean Britain’s energy system actually cost £1 billion more.
We have simply put the cost somewhere more visible.
And that matters.
We taxed the thing we wanted people to use
Successive governments have spent twenty years telling us that decarbonising Britain requires electrification. Replace the petrol car with an electric one. Replace the gas boiler with a heat pump. Replace fossil-fuel industrial processes with electricity. At precisely the same time, Britain chose electricity bills as one of the principal places to recover the cost of making that transition.
There is something wonderfully British about this. We decided that we wanted people to use more electricity and then made electricity more expensive to pay for it. This isn’t merely an accounting curiosity. Prices change behaviour.
A household deciding whether to install a heat pump doesn’t calculate the lifetime social costs of natural gas and renewable electricity. It looks at the price of gas and the price of electricity.
A chemical company deciding whether to electrify a production process doesn’t care that some of the costs sitting on its electricity bill are financing investments which may eventually make electricity cheaper. It compares the price of electricity in Britain with the price its competitor pays in France or Germany.
Put the cost of decarbonisation onto electricity and you make electrification less attractive. The policy designed to encourage the transition ended up discouraging the transition.
Would drilling for more North Sea gas bring our bills down?
No.
North Sea gas does not belong to the British government and it is not sold cheaply to British households simply because it comes ashore in Britain. It is produced by private companies and sold at prices determined by the wider gas market. Britain could issue more licences and extract more gas without significantly changing that market price. And because the North Sea is now a mature basin, with production more than 70% below its 1999 peak, the additional quantities involved are unlikely to be large enough to move international prices anyway.
More North Sea production might make Britain less dependent on imported gas, particularly expensive LNG, and that has a value. But it doesn’t solve the central problem with British energy bills. We already produce enough energy ourselves, producing more won’t change househol bills. It is the peculiar way in which the price of gas feeds through into electricity prices, and the collection of network, environmental and policy costs that we then choose to load onto electricity bills.
Moving the bill
Which brings us back to next week. The government’s abolition of VAT on domestic electricity is actually an acknowledgement of the problem. It isn’t reducing the cost of generating electricity. It is changing the relationship between the cost of electricity and the price people pay for it.
And it isn’t the only thing the government is doing. Since April, 75% of the domestic Renewables Obligation has been moved from electricity bills onto the Exchequer. In its first three months alone that transferred about £521 million of costs from electricity customers to taxpayers. The previous Energy Company Obligation schemes have also ended, removing another policy cost from bills.
For industry, the government is going further. Its British Industrial Competitiveness Scheme will exempt eligible manufacturers from the costs of the Renewables Obligation, Feed-in Tariffs and the Capacity Market from April 2027. The government estimates that alone should reduce their electricity costs by around £35–£40 per MWh. Carbon Price Support is also due to disappear in 2028.
None of these policies makes a wind turbine turn more efficiently. None makes a gas power station consume less gas. None makes a pylon cheaper to build.
They change who pays. And perhaps that is the lesson from Britain’s strange journey from having some of Europe’s cheapest electricity to some of its most expensive. We have spent thirty-five years concentrating on how electricity should be generated while repeatedly adding new objectives and new costs to a market designed in a completely different era.
The result is peculiar. Britain has successfully removed coal from its electricity system. It has built one of the world’s largest offshore wind industries. It increasingly produces electricity from sources whose underlying generation costs are low. Yet households and businesses still pay unusually high prices for it.
From next week the government will take VAT off electricity bills while Ofgem puts the price cap up because the international price of gas has risen. You couldn’t ask for a better illustration of the problem.
The cost of electricity and the price of electricity are not the same thing. And if Britain wants an economy increasingly powered by electricity, fixing the gap between the two may matters a lot more than building another wind farm.