The conflict in the Middle East has demonstrated, again, the fragility of the UK’s energy security.
Our ongoing reliance on fossil fuels places sustained pressure on households and businesses, damaging the economy and hammering budgets.
There are a number of reasons for this, in particular an over-reliance on imported gas which has left the nation in a weak position following the outbreak of the war with Ukraine.
Others in the media look to blame the transition to net zero for higher costs, despite evidence that renewable energy drives down energy bills for consumers.
My opinion is that the underlying reasons for high energy costs are structural and long-standing, made worse by international conflicts, but not caused by them.
Understanding these structural drivers is essential if the UK is to reduce long-term energy costs, once and for all.
1. The cost of importing fossil fuels
The UK is heavily exposed to international fossil fuel markets.
Although it still produces some oil and gas domestically, the country is a net importer of gas. Gas is used both for heating homes directly and for generating electricity.
When global gas prices rise as they did following the 2022 invasion of Ukraine UK energy prices rise with them. This is because:
- Gas is traded internationallly
- Prices are determined by global supply and demand
- The UK must compete with other countries for supply.
This dependence on imported fossil fuels makes the UK vulnerable to geopolitical shocks and price volatility.
Reducing long-term costs therefore requires reducing reliance on fossil fuels altogether.
2. Drilling for more North Sea oil and gas would not lower bills
Some argue that expanding oil and gas extraction in the North Sea would reduce domestic energy prices. However, oil and gas fields in the North Sea are operated by private companies.
These companies:
- Sell their output on international markets
- Charge the global market price
- Aim to maximise profits for shareholders
There is no mechanism requiring them to sell at a discount to UK consumers. Even if production increases, UK prices would still be tied to global markets.
In short, expanding North Sea production would not shield UK households from international price swings. Domestic extraction does not equal domestic price control.
3. The Marginal Pricing Mechanism
A key driver of high electricity prices is the UK’s wholesale electricity market design.
Under the marginal pricing mechanism, the price of electricity is set by the most expensive generator needed to meet demand, which is almost always gas-fired power stations.
This means that even if most of the electricity is generated cheaply (e.g. wind or solar) the final price is often set by gas or coal.
So when gas prices rise, all electricity becomes more expensive – even renewable electricity with its low operating costs.
It is therefore fossil fuel pricing, not renewable energy, that drives high electricity bills. In fact, renewables tend to lower wholesale costs when gas prices are stable.
Reforming market pricing so cheaper generation is not automatically priced at gas levels could significantly reduce electricity costs over time.
Donal Brown of the the think tank Common Wealth just produced an excellent research paper examining the fallacy of continuing with the outdated marginal pricing mechanism, and recommending a new approach where all power is purchased by the single buyer (National Energy Systems Operator) to balance the system.
The Government should instruct the NESO to purchase low carbon power at fixed prices instead of receiving gas linked prices in the wholesale market. Rather than have electricity prices set by inflated wholesale gas costs, our proposal would fix those prices at a (low) level reflecting their cost, meaning lower bills for homes and businesses.
4. Poor quality housing and tremendous amounts of waste
One of the most significant long-term drivers of high bills in the UK is poor quality housing.
The UK has some of the least energy-efficient homes in Western Europe, where millions of properties:
- Have poor insulation
- Lose heat through walls, roofs, and windows
- Require lots of energy to maintain comfortable temperatures
As a result, households consume more gas and electricity than necessary, and people still shiver through winter and get unnecessarily ill.
We can address this in a number of ways:
Raising Minimum Energy Efficiency Standards
An increase in Minimum Energy Efficiency Standards (MEES) would require landlords and property owners to upgrade inefficient homes, or risk being unable to rent out their homes.
This would drive a nationwide insulation programme, bringing upgrades in insulation and heating systems to millions of homes and delivering long-term reductions in household energy costs.
The Labour Government has moved to introduce new legislation that will increase minimum energy efficiency standards. What it also needs is to provide Local Authorities with the resources they need to enforce the new regulations and suspend rental licences for landlords who are in violation. Otherwise, many landlords will continue to operate with impunity, knowing that people in desperate circumstances will continue to live in sub-standard properties.
The Warm Homes Plan
The £15 billion Warm Homes Plan aims to support this transition through investment in insulation and home upgrades, particularly for lower-income households.
Improving housing efficiency and introducing solar power is arguably the most effective long-term way to reduce energy costs, because it reduces the amount of energy needed in the first place.
5. New nuclear power brings massive costs to customers. Sizewell C and the Regulated Asset Base Model
From January 2026, energy bills began to include costs associated with new nuclear power stations such as Sizewell C.
This is being funded through a Regulated Asset Base (RAB) model. Under RAB consumers begin paying towards construction costs before the plant is operational, partly transferring the financial risk from investors to billpayers.
While nuclear energy provides high levels of ‘base-load’ electricity generation once operational, the financing model means households will contribute upfront, increasing near-term bills and obligating everyone to pay, even if they are opposed to new nuclear development.
6. The UK’s ageing electricity distribution system
The UK electricity grid was privatised in the 1990s, creating regional monopoly distribution operators.
After decades of underinvestment and rising demand (particularly as transport and heating electrify), the distribution network now requires major upgrades to accommodate new renewable energy connections and increased demand from EVs and heat pumps.
These infrastructure upgrades are funded through network charges, which are ultimately paid by all consumers.
Years of monopoly control and delayed modernisation mean billpayers now have to bear the cost, whilst shareholders of DNOs have been enjoying high dividends for decades.
7. Community energy as a lower-cost alternative
A thriving community energy sector can deliver lower-bills, energy security, shared-ownership, and reduced environmental impact.
It can give energy customers control over their long-term energy costs, but developing and supplying energy using a different model to the broken ‘Big Six’ corporate energy model which clearly is not serving customers well.
As well as providing affordable on-site clean energy, locally owned renewable schemes bring a host of additional benefits:
- Selling low-cost electricity directly to members.
- Operating without high standing charges.
- Reducing exposure to volatile markets and marginal pricing.
Because they are not driven by shareholder profit in the same way as large suppliers, community energy projects often provide cheaper energy to local communities.
They also bring wider benefits to the local community by providing business to local tradespeople (solar installers, heat pump installers, plumbers) or establishing a ‘community benefit fund’ which can be used to improve parks, schools, or other community assets.
The long-term solution: Reduce fossil fuel dependence and energy waste
As I hope I have explained, UK energy costs are high because of several reasons that have been ignored for decades:
- Exposure to volatile international fossil fuel markets.
- Market rules that allow gas to set electricity prices.
- The poor quality of our housing stock
- Infrastructure and financing costs passed to consumers.
Expanding fossil fuel extraction would not fundamentally solve these problems, and nor will new nuclear power.
I believe that the most effective long-term strategy to reduce energy costs for UK consumers is to cut ties with imported fossil fuels and reform electricity market pricing.
We must introduce stronger Minimum Energy Efficiency Standards and upgrade housing efficiency through the Warm Homes Plan.
And we must expand community energy ownership, giving local people a stake in the energy that powers their lives.
As former MP Caroline Lucas said on BBC Question Time: “every time an energy shock happens we say it is a wake up call, yet we keep on hitting the snooze button”.
After the turmoil to energy markets caused by the Middle East conflict, are we going to hit snooze again, or are we going to wake up and take action?
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