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Price-of-Power-Discussion-Paper-Final.pdf

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Abstract:

Novel analysis from this paper shows that while gas-linked revenues accounted for 90% of generation and two-thirds of total costs in 2024, this is expected to fall to 60% and just under half of costs by 2028.

Three years after the energy crisis, residential electricity prices in the UK 2025 are still historically high, and the UK is amongst the highest priced countries for electricity. This paper finds that bills have risen by £150 in real terms since 2021, and that £112 of this increase is due to higher wholesale market prices driven largely by gas.

Britain's electricity system is also going through a profound change. As the share of output with a fixed price contract or CfD rises, the role of gas generation in setting household prices will fall, since increasing volumes of generation will be delinked from gas prices. Novel analysis from this paper shows that while gas-linked revenues accounted for 90% of generation and two-thirds of total costs in 2024, this is expected to fall to 60% and just under half of costs by 2028.

However, this 'automatic' reduction in the share of gas prices in bills is limited in effect by the volume of renewable generation receiving a CfD that is at or below the wholesale price. The authors argue that going further to reduce bills requires action on policy costs. They therefore recommend UKERC's Pot Zero proposal which targets the most substantial policy cost on bills (at £102): the Renewables Obligation (RO). Moving RO-supported projects onto CfDs could deliver consumer savings of £2-8 billion per year in the late 2020s, equivalent to £20-80 per consumer.

Key messages:

Wholesale gas price increases remain the dominant driver of bill rises since 2021, representing 66% of the real-terms increase.

Gas-linked revenues are set to decline significantly by the late 2020s. Alongside other changes to the generation mix and market this could lower average prices by £7/MWh and save consumers around £20 annually.

By reforming legacy policy costs, UKERC's Pot Zero proposal could reduce consumer bills by £20 to £80 per customer per year.

In future work, UKERC's Whole Systems mission will explore options to help hold CfD prices down, reduce the costs of curtailment, minimise the costs of network upgrades and refurbishment, and mechanisms to reallocate costs between categories of consumer, for example, through tariff reform.

Publication Year:

2025

Publisher:

UKERC

DOI:

https://doi.org/10.82226/543.p.000006

Author(s):

Camacho-McCluskey, K., Blyth, W., Gross, G. and Carmichael, R.

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