Why have power prices fallen so little?

Gas prices are a major driver of electricity prices. However, although gas prices have come down a lot since the peak of the Ukraine war, electricity prices are still a long way above where we might have hoped. In real terms, bills are around £183 higher than they were in mid-2020.

The figure below shows the (real-terms) breakdown of that change, based on the energy price cap data published by Ofgem.

Breakdown of change in electricity bill

The largest single item is wholesale electricity (£85). This increase is probably mostly due to gas prices, which in 2020 were around 40p/therm – perhaps 50p in current prices. Over 2024 they were around 70 or 80p and they are even higher now.

But the other increases, which are mostly attributable to green policy, account for the majority of the change. The biggest element is Balancing and Network costs (£50). Ofgem publish no breakdown of the figure, but I assume it covers the Balancing Mechanism, which is setting us back an extra billion pounds per year since 2020 (see figure below). There is also presumably the costs of new network infrastructure.

Cost of balancing the grid

Subsidies represent only a small part of the increase in bills – just £11 or so. Perhaps surprisingly, most of this is not due to Contracts for Difference. The cost of CfDs has actually fallen slightly. I interpret this as a reduction in subsidies per kWh because of higher wholesale prices, but offset by higher volumes, as new renewables generators come on stream.

Ofgem gives only limited information on the other subsidy schemes and levies – rates rather than costs. It is clear, however, that there have been big real-terms increases in the rates chargeable under several schemes.

Changes in rates of other subsidies

These include the Energy Company Obligation (levies to fund insulation schemes) and the Warm Home Discount (subsidies for poor families). The AAHEDC appears to be a subsidy for homes in Northern Scotland. I assume the amounts involved for the latter are relatively small.

Supplier costs are up by £37. This is down to two new allowances in the calculation. The adjustment allowance (£16) “is used to account for unforeseen costs and changes in the energy market, ensuring that energy suppliers can cover their costs while protecting consumers from excessive charges.”

Meanwhile, the Backwardation Allowance (£11) “is intended to account for the higher costs energy suppliers face when purchasing wholesale energy in a market where future prices are lower than current prices. This allowance helps ensure that suppliers can cover their costs and continue to operate sustainably.”

And there you have it. Your bill continues to be driven up by renewables. And if you count the failure to use our own fossil fuel resources, you can probably say it is being driven up entirely by green policy. It's not just renewables doing this though. As we have seen, there are an array of other costs trying to rectify the damage that wind and solar are doing to families and the economy.

You shouldn't expect the upwards trend to change. Sir Keir and Mr Miliband intend to keep squeezing you until the pips squeak.