According to a recent study, the way that electricity prices are currently decided in the UK has caused household bills to go up by £7.2 billion over two years. Under current rules, energy suppliers must pay the highest price for wholesale electricity, no matter how it is generated. Gas-fired power stations, which are the most expensive way to produce electricity and account for about 40% of all electricity used in UK homes, play a significant role in this price rise. As a result, households are also paying more for electricity from other sources, according to the non-profit climate think tank, the Carbon Tracker Initiative.
Why is my electricity bill so high?
Electricity prices are decided through a process where companies bid how much money they will accept to make one unit of power. When there are plenty of renewable energy sources available such as wind and sun, the wholesale cost drops to almost zero. But when these sources are limited, the cost is then set at the highest bid. This means that homes are paying more for their electricity, even when the cost to generate it in reality is much lower.
The Carbon Tracker Initiative suggests that using an average price could make the UK’s electricity bills much lower. The Department for Business, Energy & Industrial Strategy (BEIS) has already launched a major review of the electricity market to make prices cheaper for customers in the long term. The review is aimed at reducing instability in gas prices so that cheaper renewable energy is not then made more expensive as a result.
Electricity prices rises have been caused by recent events in the global gas market. Wholesale prices have been high for the past two years, due to disruptions in gas supplies caused by Russia’s invasion of Ukraine. Even though they have fallen since August 2022, they are still about three times the price of May 2021.
How will the temporary 45% “Extraordinary Returns” Tax in January benefit me?
Due to the current pricing system, firms that produce renewable energy have received much more money for their power than it costs them to produce it. To address this, the government will introduce a temporary 45% tax in January on what they refer to as “extraordinary returns” from low-carbon electricity generators in the UK. The money collected from this tax is then intended to be used to support households and businesses with their energy bills.
Can I expect fairer bills in the future?
In conclusion, the analysis from the Carbon Tracker Initiative emphasizes the importance of introducing a fairer pricing system for electricity in the UK, particularly during the current cost of living crisis. Findings show that not only has the existing system led to a rise in household bills but that savings gained from producing renewable energy resources are also not being passed on to customers. The government’s review of the electricity market is a positive move and there’s hope that changes will now follow to ensure consumers pay a fairer price for their electricity in the future.
