According to the latest statistics on international domestic energy prices from DESNZ covering the second half of 2023, electricity prices in the UK were more expensive than in any EU country, whereas gas prices were among the lowest.

High electricity prices affect UK household budgets, leaving a smaller portion of disposable income after housing and fuel costs. In recent estimates, 13% of households in England, 20% in Scotland, 14% in Wales and 24% in Northern Ireland are classified as fuel poor. Now more than ever, renewables are contributing a significant share of electricity generation, but their low cost is not being passed on to households.

Nesta has previously shown how lowering the cost ratio of electricity to gas permanently would help make heating greener. High electricity prices compared to gas may hold back the UK’s decarbonisation efforts compared with other European countries. Expensive electricity discourages the adoption of electric vehicles, heat pumps, and other electric-based clean technologies, as their economic attractiveness diminishes when electricity costs more.

This latest data shows the next UK Government will likely need to tackle, in policy terms, the high price of electricity.

Key insights from the latest data

• Household consumers in the UK faced higher electricity prices in the second half of 2023 than those in any of the 27 EU countries – standing at £0.36 per kWh (all taxes and levies included).
• Gas prices were the 9th least expensive compared to 27 EU countries and the 2nd least expensive compared to the 14 countries that were members of the EU prior to 2004, standing at £0.08 per kWh (all taxes and levies included).
• Last year, renewables accounted for a record 47.3% of electricity generation in the UK – but the low cost of renewables is not being passed on to consumers.
• One reason that electricity prices are high in the UK is that gas sets the marginal price more often than in any EU nation, doing so 97% of the time in 2021.
• Another reason is because electricity is subject to carbon taxes, whereas gas used for heating is not. In addition, levies on bills, which pay for some subsidies for renewable energy and for schemes to tackle fuel poverty, are strongly skewed towards electricity rather than gas.
• Without taxes and levies applied – which include any taxes or charges relating to environmental or social policies and VAT – electricity prices in the UK stood at £0.27 per kWh and gas prices stood at £0.07 per kWh.
• In the last half of 2023, the EU average ratio between the cost of electricity and the cost of gas stood at 2.5, whereas in the UK, electricity was 4.7 times the price of gas per kWh.

UK consumer prices for electricity have been increasing at a much faster rate than the EU average and have fallen more slowly than countries in the EU. For medium household consumers, the price per kWh of electricity stood at £0.36 in the second half of last year, ranking as the most expensive, for the first time, compared to all EU countries.

Historically, the UK has had average electricity prices compared to EU countries. However, this started to change in 2020 when prices increased significantly above the EU median. In 2022, UK electricity prices soared to 55% above the EU-UK median in the first half and a staggering 93% above in the second half. In 2023, prices remained high – it was in the latter half of the year that the UK passed all EU countries, with electricity prices 78% above the EU-UK median.

Despite energy prices remaining at historically high levels, UK gas prices were 9th least expensive compared to all EU countries and 2nd least expensive compared to EU14 countries – standing at £0.08 per kWh in the second half of 2023 with taxes and levies included.

The combined impact of higher energy prices, other increased costs, and warmer weather (0.2 degrees Celsius warmer than last year) meant that domestic consumption was at the lowest level recorded for the fourth quarter of 2023 in the government’s published series.

Meanwhile, renewables’ share of electricity generation increased to a record high of 47.3%. Electricity generated from wind increased to more than a quarter of the UK’s electricity in 2023.

In the final three months of the year, wind generated more electricity than gas for the first time, with 26.45 TWh from wind compared to 23.68 TWh from gas.

However, UK households are still paying for their electricity many times over what it now costs to generate and transmit it from the most efficient clean energy sources.

Although the price of gas for household consumers in the UK is lower than the EU-UK average, gas has a disproportionate effect on electricity prices in the UK.

The prices of fossil fuels play a substantial role in determining the market price of electricity. The wholesale price of electricity is set by the cost of producing the last unit of electricity needed to meet demand, which is nearly always generated by gas power plants with high marginal costs.

Put simply, when demand for electricity is high – such as when the sun sets and lights are turned on – gas-powered energy plants are used to supplement electricity generation when other forms, such as wind, are low or supply is otherwise disrupted.

In Great Britain, as in many other electricity markets, the price is determined by the most expensive source required to meet demand. Compared to EU countries, gas sets the wholesale price of electricity in the UK a significant proportion of the time. This is due to the UK's reliance on gas power plants for balancing supply and demand.

As electricity prices are effectively ‘coupled’ with natural gas prices, which are volatile and influenced by market conditions, the cost of electricity remains high even if household gas prices are lower.

Another reason why electricity prices are high is that levies on bills, which pay for some subsidies for renewable energy and for schemes to tackle fuel poverty, are strongly skewed towards electricity rather than gas.

Combined, this results in the electricity-to-gas price ratio in the UK being higher than countries in the EU in the last half of 2023.

The high electricity-to-gas price ratio in the UK strains household budgets and makes decarbonisation harder to achieve. The experience of other countries shows it doesn’t have to be this way.

With electricity prices now above EU counterparts, closing the gap between electricity and gas prices is one of the most important things the next UK government could do.

The next UK government should reform levies that artificially increase the price of electricity while scaling up renewable generation and explore other market reforms that could reduce costs.

Doing so would ensure that the UK remains competitive and closer to achieving its environmental commitments, while making energy more affordable for consumers and reducing the proportion of household income spent on staying warm.