Trends and Forecasts for UK Electricity Prices

The Office for Budget Responsibility has bad news for UK electricity consumers: energy prices are set to rise by seven per cent in the winter of 2013, and then rise again by a further three per cent in 2014. The figures, which were released as part of the 2013 Budget, carry a warning of hard times to come for struggling families, who have already been hit hard by benefit reductions, frozen public sector wages, and a lack of full-time employment opportunities.

Why are UK Electricity Prices Rising?

The bulk of the predicted price increase is due to an increase in the price of gas on the global market. The UK relies on imported gas for electricity generation as well as for household heating. Burning gas to produce electricity is relatively clean, compared to electricity generation using other types of fossil fuels, a fact that has prompted the UK government to build many gas-fired power station over the last decade in an attempt to bring down carbon emissions in the short-term, while research and development of renewable alternatives is ongoing. Unfortunately, the price of gas is very volatile, which means that UK energy consumers are subject to sudden rises in their household heating and electricity bills.

Wholesale gas prices have been on a general upwards trend since October 2009, and most experts predict that the increase will continue during 2013 and 2014. Natural gas is a limited resource and the most readily available supplies are gradually running lower and lower, which means that gas drilling companies must spend more money on equipment and a skilled workforce to find and extract the reserves that remain.

As well as wholesale gas prices, the cost of electricity in the UK is also affected by the cost of transporting and delivering gas to UK power plants. According to a report from the Committee on Climate Change, increases in the cost of transporting and distributing gas accounted for 20% of the increases in household gas bills during the period from 2004 to 2011. Gas networks need constant maintenance to repair leaks and ensure a safe and reliable supply to power plants, industry, and communities all over the UK. The cost of making repairs is ultimately passed on to customers in the form of higher energy prices.

British consumers are also footing the bill for the UK government’s commitment to tackling climate change. The harmful effect on the atmosphere of the huge amounts of carbon dioxide produced by coal, oil and gas power stations is well documented. The UK, along with many other countries, has signed up to international agreements to reduce carbon emissions over the next few years. In order to meet the targets agreed with other nations, a significant investment in new forms of power generation, such as wind, solar, and tidal energy, is required. Consumers pay a green tariff as part of their energy bills, which acts as a subsidy to help finance the building and operation of new renewable electricity generating facilities.

Prices Trends in the UK Since 2000

Since the turn of the century, the cost of household heating and lighting in the UK have almost doubled in real-terms (taking inflation into account). Prior to this time, energy prices had been declining since the late 1980s. Figures from the Department of Energy and Climate Change show a general increasing trend in the price of gas and electricity over the last twelve years. Gas prices rose more rapidly during late 2005 and 2006, eventually peaking in January 2007 at their highest value in 20 years. There was a respite period of a couple of years when the price of gas fell back slightly in 2009. However, the price of gas is now creeping back up to the peak level experienced in January 2007.

Since gas became one of the main fuels used to generate electricity in the UK, the price of electricity has tended to reflect the price of gas. As the UK moves away from relying on gas to generate electricity and begins to use renewable sources instead, the influence of gas prices on the price of electricity can be expected to lessen, but that does not necessarily spell out good news for customers, who have recently been forced to pay higher electricity prices to meet the cost of investment in renewable electricity generation facilities.

How Do Electricity Prices in the UK Compare to Other Nations?

Compared to consumers in other developed countries, UK electricity consumers pay relatively little tax on their electricity consumption. The average UK domestic electricity price, including taxes, was 14.27 pence per kilowatt hour for a household with moderate usage in July-December 2012. This figure is 12.4% lower than the median price among EU nations. During this period the UK domestic electricity price was the fifth lowest price among the 15 EU nations for which data was available. In contrast, the UK electricity price without taxes was 19.4% higher than the median EU price. Consumers in the UK may feel that they are being charged too much for their electricity, but taxes can only be blamed for a small proportion of the price.

UK Electricity Prices Forecast

Household electricity bills are set to rise faster than inflation during 2013, and the rise shows no sign of stopping once the spring of 2014 comes around. In fact, electricity price rises may become a common theme in the UK news over the next few years. Many coal-fired power plants in the UK are due to close in 2015, which will drive up the demand for expensive gas and investment in renewable energy even further.

In the face of rising electricity prices, UK consumers are advised to compare electricity suppliers to get the best deal, take advantage of bundled packages offered by energy companies, and reduce their electricity consumption. Some homeowners are even beginning to generate their own electricity using solar panels fitted to the roof of their home. These measures can go some way towards helping the British consumer to manage financially as the cost of electricity rises.