Why are the UK’s energy costs so high? Report reveals why electricity bills have rocketed 147% since 2010

Household electricity bills have risen by 147 per cent since 2010, a report by the Institute for Fiscal Studies said this week. 

VAT on bills will be cut in October from five per cent to zero, but people in the UK still pay much more for their electricity than those elsewhere.   

The UK has some of the highest domestic electricity costs of any G7 country, including Canada and the US. Household electricity prices are also among the highest in Europe. 

Energy debt is forecast to reach a record £7billion by the end of 2026, according to trade association Energy UK.

From global conflicts to creaking infrastructure and net zero taxes, This is Money looks at why bills are higher and what would need to be done to bring them down. 

How expensive are our energy bills?  

The government publishes data comparing UK electricity and gas prices with those in most of the 32 members of the International Energy Agency, as well as member states in the European Union. 

In the UK, typical customers paid 29.70p per kWh in 2025. People in France paid 22.41p per kWh, people in Sweden paid 22.99p and people in the Netherlands paid 21.22p.

A report by the IFS this week said UK electricity price growth had outpaced hikes for most other consumer goods, rising by 147 per cent since 2010. 

In common with most European countries, there was a spike in 2022 when Russia invaded Ukraine as this disrupted the energy market across the continent.  

How are electricity prices set?

Customers’ bills depend largely on how much their energy supplier pays to buy the power themselves, as this cost is passed on to households. 

Prices are set by a bidding process. Each energy generating firm states how much it would be happy to accept to produce one unit of electricity. They then contract directly with household energy suppliers at a price agreed in private.

The electricity and gas could have been bought by the energy suppliers anytime between now, and as far back as five years ago. 

Energy suppliers often spread out their purchases of energy for delivery today over a lengthy period of time, to mitigate risk caused by volatility in the wholesale market. 

What’s pushing up household electricity costs?

Different costs are included in your electricity bill, including wholesale prices, generation subsidies, network upgrade costs and, for now, VAT. 

All of these can drive up the overall price in different ways.  

1. Wholesale gas prices influence electricity prices

Wholesale costs comprised 31 per cent of the average UK household electricity bill in 2025-26, equating to £283 per household, the IFS said.

Some experts think UK electricity prices are high because we produce a sizeable chunk of our electricity from natural gas, rather than, for instance, nuclear power, but due to the way the market is structured even cheap renewable energy hasn’t reduced bills as much as it could.

The price of gas heavily influences the price of electrical power. Electricity prices are set based on the cost of marginal generation and thus the most expensive generator at that time for avoiding blackouts. 

In 2021, gas accounted for 40 per cent of total generation but set the price of electricity 97 per cent of the time, according to the IFS.

The IFS report explains: ‘The UK’s wholesale electricity market operates in half-hour periods. Trading takes place ahead of each period to ensure the electricity needed to meet demand is effectively supplied by generators in order of cost, cheapest first – a sequence known as the “merit order”.

‘The cheapest sources of generation are scheduled first, and progressively more expensive sources are brought online as needed, until enough power is scheduled to meet demand. 

‘This means that the market-clearing price for a given half hour is set by the cost of running the most expensive generator needed – the “marginal” plant. This outcome can seem counterintuitive to some.’

The UK has its own gas reserves, but the amount sourced domestically has decreased substantially over time. This means the UK imports gas through pipelines and in a liquid state, known as liquified natural gas (LNG).

Our reliance on imported gas means the UK suffers when international gas prices rise. The war in Ukraine and sanctions on Russian gas triggered a spike and now the blockages in the Middle East have sent LNG prices soaring.

Amid war in the Middle East, wholesale natural gas prices reached a three-year high earlier this month. Natural gas storage levels are also markedly lower than usual for this time of year.

Richard Neudegg, director of regulation at comparison website Uswitch says: ‘The ongoing conflict in the Middle East, including disruption to shipping through the Strait of Hormuz, has limited how much gas can move out of the Gulf, making it scarcer and pushing up the price of electricity and gas on the global market.’

Jess Ralston, head of energy at research firm the Energy and Climate Intelligence Unit, told This is Money: ‘Recent years have shown the costs of reliance on gas, with households and businesses exposed to unprecedented price spikes during what have been essentially back-to-back energy crises caused by wars thousands of miles away.’

An expert at forecaster Cornwall Insight said bill hikes reflected ‘a combination of the increasing globalisation and diversification of supply, with Great Britain’s reliance on imports meaning our energy is susceptible to global events outside of our control.’

2. Modernising creaking UK infrastructure

The cost of maintaining and upgrading the electricity grid also adds to household bills. 

In December 2025, energy regulator Ofgem approved a five-year, £28billion plan to improve electricity and gas grids. 

The money will go towards improving the UK’s electricity transmission network and maintaining gas networks, it said. 

This includes building new pylons to carry wind power from where it is generated in the north of Britain, to where it is consumed, primarily in the south.

Not all of the work will be paid for by households, but according to Ofgem the work is estimated to add £108 to energy bills by 2031.

3. Net zero green energy push

Labour wants plans to almost entirely remove fossil fuels from UK electricity production by 2030.

The 2030 target forms part of the government’s broader target of reaching net zero by 2050. This would mean that total greenhouse gas emissions would be equal to the emissions removed from the atmosphere.

Energy firms can get government subsidies if they ramp up the construction of solar or wind farms, and the cost of building this type of infrastructure is added to customer electricity bills. 

The government has temporarily funded some of the cost of renewable subsidies via general taxation rather than taxes on general energy consumption, however.

There is a lot of controversy about whether or not the push to net zero by 2030 has a major impact on UK electricity bills.

Earlier this month the National Audit Office said Labour’s net zero 2030 goal was adding £1.9billion per year to bills. 

The IFS said all taxes and levies of all kinds on energy bills had grown by 59 per cent in real terms between 2017 and 2025 and comprised 23 per cent of an average household’s electricity bill by the end of that period. 

But recent changes to taxes combined with higher wholesale prices have meant that taxes and levies only made up 17 per cent of an average household’s bill in July to October 2026.

The IFS said consumers faced a ‘crunch period’ of ‘steep increases’ to their bills as expensive grid upgrades linked to the net zero and decarbonisation push add more costs to people’s electricity bills. 

It said bills were higher due to the cost of subsidising renewable plants that were built when they were relatively expensive, as well as the imposition of carbon taxes on fossil fuels. 

The IFS said the race to net zero risked ‘exacerbating’ energy bill hikes and urged the government to water down and slow down its net zero target in a bid to help keep bills down for households and businesses. 

Peter Levell, deputy research director at the IFS, said: ‘The continued growth of renewables is taking us towards a system with relatively high fixed costs, including the significant capital costs of installing capacity and ensuring the grid can distribute and store electricity as needed, compared with much lower day-to-day costs of producing electricity.’ 

4. Lack of time of use deals 

In its report this week the IFS said many Britons could pay less for their electricity if the government promoted the take-up of time-varying prices – another word for tariffs such as Economy 7 or Economy 10. 

Time of use deals mean households are charged different prices for electricity at different times. Often power is cheapest overnight, when demand on the grid is lowest. Only 10 per cent of UK households use time-varying prices at the moment. 

The IFS said electricity in Scotland could often be ‘effectively free’ at certain times because of frequent windy weather, while at other times, and particularly in the south of England, it must pay expensive gas generators to boost supply.

It added that in a study: ‘Heat-pump owners in the UK on a time-varying tariff roughly halved their evening peak consumption in response to a 60 per cent higher price and doubled it during off-peak periods when electricity was 40 per cent cheaper, with annual bill savings of around £300.’ 

To promote a closer link between the costs of electricity production and consumption, the IFS said the default household electricity tariff could be made to be time-varying. 

However, it admitted that this would require households to spend more time monitoring power usage and that this could be a challenge for some. 

Neudegg, of Uswitch.com, added: ‘These tariffs can cut costs significantly, but only for households who already use energy in those windows, or can shift things like EV charging and the majority of energy-intensive tasks to cheaper times.’ 

Government says it inherited ‘broken system’ 

The government has introduced a series of temporary measures to ease energy bills.  

VAT will be cut from household electricity bills. The reduction from five per cent VAT to zero will come into effect on October 1, saving a typical household about £45 a year. 

Ministers claimed it would be funded by savings from the cancellation of the digital ID programme.

The IFS said the VAT cut ‘inefficiently encourages households to consume more energy’. 

In November 2025 former Chancellor Rachel Reeves said the government would cut household energy bills by £150 a year by shifting part of the cost of renewable-energy support from energy bills to general taxation and by abolishing the Energy Company Obligation scheme from April 2026. 

Labour is also understood to be mulling additional measures to support households amid rising energy costs, including extending the £150 Warm Home Discount to people who do not currently qualify for it.  

A Department for Energy Security and Net Zero spokesman said: ‘We inherited a broken system.

‘Breaking the link with fossil fuels, upgrading our network and transitioning to clean power is the only way to bring down bills for good.

‘Alongside this, we have cut VAT on electricity bills from October, on top of the £150 we removed earlier this year, and we will keep looking at what more we can do to protect families from unaffordable bills.’

Could energy bills rise by 25% next year? 

Since Labour came to power, the energy price cap has increased by £155, rising from £1,568 to £1,723. 

Britons could face a 25 per cent increase in household annual energy bills in January as wholesale costs surge, a report published this month claimed.

European energy prices have risen sharply since the Iran war started in late February, disrupting oil and gas supplies from the Persian Gulf. 

UK month-ahead gas futures have jumped by 150 per cent since the war in Iran started, which is expected to raise Ofgem’s energy price cap in January.

An average household is facing a 4 per cent increase in their energy bills to £1,723 per year from October, and is now expected to rise by a further £427 to approximately £2,150 in the new year, Bloomberg Economics said.

This would push bills close to the £2,500 energy price cap brought in following Russia’s invasion of Ukraine in 2022. But in 2022 the government subsidised the difference so that a typical household only paid the cap.

The analysis by Bloomberg Economics found that higher energy bills looked set to coincide with inflation in Britain rising to four per cent, double the Bank of England’s two per cent target.

Meanwhile energy firm Eon predicts the energy price cap for January 2027 – which will be announced towards the end of November – will be more than £300 higher than it is now, reaching £2,027. 

From 1 October to 31 December 2026, the price cap will be £1,723 per year. This has gone up by 4 per cent compared to the last price cap period.

For a household with typical usage, paying by direct debit, the energy price cap is currently set at £1,663 a year.

The energy price cap is not a maximum household bill. It limits the amount suppliers can charge per unit of energy and through standing charges, so what a household actually pays will still depend on how much gas and electricity they use. 

Households on a standard tariff or coming to the end of a contract should shop around to find the best energy deals. There are fixed deals currently available below the price cap.