Transcription
If you live in the UK, you'll know that energy prices are frustratingly high. Even though we're through the worst of the cost of living crisis, energy providers are still trying to charge more for energy. Data suggests that the UK has some of the highest energy prices in the Western world.
In fact, in December, polling from YouGov found that 23% of people reported that most days they avoided turning the heating on, and 14% reported they have not used electrical items as often as they needed to, presumably to save on electricity bills. Considering that the UK is the sixth largest economy in the world, it's remarkable that this is the case.
So in this video, we're going to have a look at the UK's energy prices currently, why they're so high, and ultimately what needs to happen in order to bring them down.
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If you want more UK political drama from us, then check out our podcast, Starmageddon, where we track the successes and failures of this new Labour government. Find it over on the TLDR Podcast YouTube channel or in your favorite podcast app.
Now, prices of consumer energy in the UK are dictated by the energy price cap, which is set by Ofgem on behalf of the government. This is a limit on the amount that suppliers can charge on each unit of gas or electricity used. Between 2010 and 2021, gas prices largely stabilized, and electricity prices grew steadily by 36% over this 11-year period.
In 2021, though, they rose significantly. There were a huge variety of reasons for this, not least the war in Ukraine and the increased demand after COVID. As such, the energy price cap rose by 12% in October 2021, 54% in April 2022, and was set to rise by 80% again in October 2022. This was overturned, though, by the government, who intervened and limited it to 27%.
Despite this, the energy price cap remains high, and it increased again this year by 1.2%. It's expected that it will rise again by between 3 and 6% in April. The point is, while these increases seem small, they contribute to the persistently high prices that British consumers pay for energy in the UK.
To understand why prices rose so much specifically in the UK, we need to understand exactly how the price cap is set. Essentially, Ofgem looks at how much energy providers have to pay. This includes the cost of the energy on the wholesale market, network maintenance, and green levies, and sets the cap accordingly while giving them a profit margin of around 1.9%.
So we need to go one level deeper. Why is energy on the wholesale market in the UK so expensive? Well, this is where it gets interesting. Purchasing energy isn't as simple as purchasing other products, namely because you can't really store it—at least not easily and not for a significant amount of time.
Therefore, the electricity system operator, or ESO, is tasked with making sure that the energy supply remains stable. Electricity is traded in wholesale markets, with generators selling electricity to off-takers, the energy suppliers like EDF or Octopus Energy. The thing is, things don't always go to plan, and various real-world issues, such as breakdowns in power plants and issues with undersea cables, can result in electricity being required from somewhere else.
This is known as the balancing mechanism, and it essentially helps off-takers purchase extra energy in real time when required. Every 30 minutes, every single day, there's an automatic auction with different energy generators offering to sell their energy to the grid at different costs. The more costly the energy is to generate, the more expensive it is.
Wind turbines, for instance, provide very cheap energy once they're up and running; there are few additional costs. Other forms of energy generation will cost more. Gas power stations, for instance, will charge significantly more as they're used less frequently and have higher costs, for example, more staffing.
Interestingly, this is all publicly accessible data. At the time we were writing this script, the wholesale price being paid was £19.94 per megawatt hour, with 44.1% of energy coming from wind turbines and 36.5% coming from gas. Generally, if the wind is blowing, suppliers will purchase the cheaper energy from wind turbines, and if it isn't, they'll purchase energy from the more expensive suppliers.
So far, this all makes sense. The thing is, as we showed earlier, energy companies don't purchase energy from one type of generator at any given moment; rather, they purchase it from multiple different sources. The issue is that the UK operates something known as marginal cost pricing, so that operators pay for the most expensive unit needed to meet demand at any particular moment.
If, for instance, gas is needed in the energy mix, which is a costly form of energy generation, then all other units of energy in the mix at that moment will charge the same as gas. This is known as marginal cost pricing. The problem is, although the UK is certainly moving towards renewables, it still relies heavily on gas. So much so, in fact, that for 98% of the time, it's the more expensive gas generators that set the overall price of energy.
Now, there are many complicated reasons for why the system is set up this way, but essentially one of the big pros is that it results in low carbon electricity producers being paid more. Theoretically, this should allow them to recoup their upfront costs and invest more. However, often this isn't the case.
Many wind farms, for instance, have agreed contracts for difference with the government, which means that the government effectively assumes a lot of the risk and therefore tops them up when they earn less. The result, though, is that when they're paid more, they often have to pay this back to the government.
As a result of this system, and particularly as a result of the UK's reliance on natural gas, the UK looks like an outlier on the international stage. Industrial electricity prices were about 50% above average, with a cost of around 2.85p per kilowatt hour. Other comparable nations, such as France and Germany, have an energy cost of only around 17p per kilowatt hour.
So what can we do? Well, understandably, there have been calls from various people to end this marginal cost system. Jack Wilin, writing for Liberal Democrat Voice, wrote an article in January titled "Marginal Cost Pricing Scamming Britain Since 1989," in which he argues that under this system, it's regular people that lose. Similarly, Richard Murphy of Tax Research makes a similar point, with him expressly calling for the system to be changed.
This is certainly one thing that could help, although changing this would be one of the most radical overhauls to the system in years and would certainly annoy the energy sector. Another thing that could be done is investing more in low carbon energy, including nuclear.
We've actually done another video on this on the UK channel, so go and check that out. But essentially, if we were to have the option to rely on other forms of energy generation other than natural gas to the point that it was no longer needed in the energy mix, prices would fall even under the current system.
Whether Labour has the political and economic capital to do this, though, is another question.
That's not the end of this story, though. With 2025 already shaping up to be a rather busy year for news, in fact, there's so much going on that we don't have time to cover it all. Just in America, there's everything from the question of whether Trump's becoming an imperial president to America's wild history of territorial expansion to questioning if the US is actually an oligarchy.
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