Nearly half of the UK’s energy is already from renewables – why are bills so high?

The UK is seeing a second increase in energy price caps this winter, announced by Ofgem on 1 January. Energy bills skyrocketed in 2022 and have continued to remain high and above pre-Covid levels.

The UK’s dependence on gas remains a key challenge for energy security. British Gas owner Centrica this week warned that the UK gas stores have fallen to “concerningly low” levels in the midst of freezing temperatures. Centrica said it had less than a week of gas demand in store, though Downing Street insists the UK has sufficient supply.

Gas remains a concern despite the fact that in 2024 more than 40 per cent of the National Grid was powered by renewables (a mix of solar, wind, and hydroelectric), which Labour has promised will drive down energy prices.

A quarter of the UK’s power comes from fossil fuels, namely gas. The remaining power comes from nuclear (13 per cent), biomass, such as food and agricultural waste (4 per cent), and around 10 per cent from interconnections to other countries.

In general, electricity from renewables should be cheaper to generate than from gas, which would bring bills down for consumers.

Yet the UK’s reality is far more complicated. There are a few key reasons for this. The capacity of renewables is still not high enough to meet all demand.

The high upfront costs of building renewable energy infrastructure also drive up prices, as businesses recover their investment.

The biggest driver of high electricity prices, however, is the UK’s marginal pricing model, which means that electricity prices are mostly dictated by gas prices.

The model means that the price for electricity is based on the most expensive source which was used to meet energy demand across the UK, set at intervals of every half hour.

If both gas and renewables have been used in any half-hour period, the more expensive (gas) price will always be set overall, regardless of whether renewables made up the larger proportion.

Bob Hope, policy director at the LSE Grantham Research Institute on Climate Change and the Environment, explained to The Independent: “The cost of generating electricity is different for each supplier, and so the price the network pays, and then passes on to consumers, is set by the most expensive of the electricity suppliers that is required to ensure all of the demand is met. This is the marginal price and every supplier (whether they are gas or renewable) receives it, regardless of how much it costs them to supply the electricity.”

As a result, renewable energy sources may be able to provide electricity at lower cost but are paid the same rates as natural gas.

The UK has had marginal pricing since the late 1980s, when energy companies were privatised. However, it may no longer be fit for purpose with the increasing security of renewables.

“The current system does not fully transfer the value of renewables to consumers,” says Susanna Elks, senior policy adviser at climate think tank E3G.

“There is more that the government can do to ensure that the full value of renewables flows to consumers. This falls into  three key areas – preventing profiteering by  electricity generators; reducing  the costs of building  new  generation; and ensuring  that households get access to renewable power when it is cheapest.”

High gas prices trigger high energy bills

A major reason why energy prices spiked in 2022– and have remained high – is because of Russia’s invasion of Ukraine.

Russia was previously Europe’s largest gas supplier, and second only to the US in natural gas production worldwide.

The war in Ukraine disrupted Russian gas supplies, making them more unreliable; not least, the explosion of the Nord Stream 1 and 2 pipelines in September 2022, which Danish police branded as “sabotage”.

In late 2022 and early 2023, the UK and Europe introduced sanctions restricting transport of Russian oil and gas.

Combined, these market factors led to a spike in oil and gas prices; the average price of natural gas reached a 14-year high in August 2022, while crude oil prices were at their highest since 2011.

The fallout from Coronavirus and high inflation also compounded to make energy bills climb for households in Britain.

In the UK, wholesale gas prices have decreased from their peak in 2022. But the latest average wholesale price for gas (96.79p/therm in October) is still over triple the pre-Covid levels, according to Ofgem data (27.9p/therm in January 2020).

Wholesale electricity prices are 151 per cent higher than pre-Covid levels, according to Ofgem data, at £88.96/MWh.

In the past decade, renewables have taken over the lion’s share of the national grid, rising from just 10.7 per cent of UK power in 2014, to 43.1 percent in September 2024 (the specific mix varies day to day).

However, due to marginal pricing model that sets the price of electricity at every half hour, gas sets the price around 98 per cent of the time – according to a 2021 study – even though it only contributed to 40 per cent of the grid in that year.

Imperial College energy research Ian Staffell, one of the paper’s authors, says that this is partly down to gas being a more reliable part of the grid than renewables – a reality influenced by the UK’s geographical isolation and lack of energy storage.

“It is a lot more expensive for us to build power cables under the sea, interconnecting to other countries. We can’t trade as much power with other countries. So when the wind’s not blowing here, we can’t rely on renewable electricity from abroad, as easily Germany,” Dr Staffell told the Independent.

“Other countries like France, Norway, they’ve got lots of energy storage. They can rely on wind and solar energy that they charged up over the previous days or weeks, while we can’t so much.”

Energy storage is key because it allows cheaper renewable energy to be saved to meet demand in high-intensity periods or low-wind days, otherwise gas has to be switched on as part of the equation.

For the first time on record (since 1979), the UK had the most expensive electricity prices of any member country within the International Energy Agency, according to latest data published by the Department for Energy Security and Net Zero (DESNZ).

The UK’s domestic energy prices (including taxes) were 72.7 percent above the average for IEA prices in 2023, at 36.4p/kWh compared to an average of 21.1p/kWh.

The data was not yet available for Australia, Japan and Denmark.

A Department for Energy Security and Net Zero spokesperson told the Independent that possible changes to this pricing model are in the pipeline.

Zonal pricing

In a review of electricity market arrangements, the government is considering an alternative model for pricing electricity, dubbed zonal pricing.

Under this model, different geographical areas of the UK would be priced independently of each other, meaning that gas-generated power in one region would not necessarily raise the price of electricity in all regions.

This would be especially positive for Scotland and the North of England, which have the highest local wind farm capacity.

The South of England, and in particular London and the Midlands, have far fewer renewable power plants.

One argument against zonal pricing points out that it would create regional disparity in prices, with areas in the South of England more likely to pay gas-determined prices.

Another concern, raised by ScottishPower boss Keith Anderson, is that such a radical change will dissuade UK energy investment, as renewables suppliers who are currently earning gas-led prices would have their income slashed.

“When you look at the investment needed in offshore wind and onshore wind, saying to people part of the way through that investment that you’ll flip the entire trading system and pricing mechanism, you run a risk investment will delay,” said Mr Anderson.

Building new renewable energy projects requires high levels of upfront capital, so businesses need to be sure they can recoup their investment; meaning they depend upon stable pricing.

Yet Dr Staffell says that power companies will still turn a profit without the artificial inflation linked to gas prices.

“Pricing reform would just make everything a bit more efficient and a bit fairer,” he added.

Most importantly, increasing the UK’s renewable energy capacity overall will protect consumers from unstable electricity prices, says climate policy expert Ms Elks.

“Building renewables will reduce our exposure to international gas price fluctuations. The UK needs to accelerate the roll out of renewables and transition to electric heating if it is to avoid repeating the recent gas crisis where bills spiralled, and the Government spent £40billion subsidising bills,” said Ms Elks.

This is laid out as a priority in the government’s new Clean Power 2030 Action plan.

“As the electricity system decarbonises, unabated gas generation is used less often,” reads the document, published in December 2024. “As we rollout renewables, we will see a significant reduction in wholesale prices, the foundation for building an energy system that can bring bills down for good.”