Why is Electricity So Expensive?

Increasing electric prices have been on the UK radar for a while now. It's all over the news, and across the front page of every newspaper. It's quite hard to escape the fact that we are currently in a post-Covid energy crisis. Rising bills are set to push two-thirds of UK households into fuel poverty by January 2023, so why is electricity so expensive to the point where it is 3x more expensive than gas and other fossil fuels?

Reason One: The Global Gas Crisis (yep, it's very connected to gas!) 

On February 3rd 2022, millions of UK customers were initially told of energy bill increases of around £700 a year from April. Since then, energy bills have increased again only this month. The crisis is global, but Europe has seen to be taking on excessive effects.

This is primarily because Russia - the main UK supplier of our gas source - has choked off our stream of cheap natural gas that we all depend on to run factories, generate electricity and heat our homes. Russia's state-owned gas exporter, Gazprom, began cutting off a number of European countries after responding to the outbreak of the war.

In turn, the reductions in gas supply has led to soaring prices due to supply and demand, and this also affects our electricity. This is because gas is a key fuel needed to generate power for electricity. 

Reason Two: Environmental Taxes and Levies

In the UK, these are called Environmental and Social Obligation Costs. They help pay for green policies and support costs involved in looking after vulnerable energy consumers, such as those struggling. This money includes costs of government programmes to conserve energy and reduce emissions. 

An example of this would be the Warm Homes Discount - a £140 energy bill discount for households on low incomes. The money derived from these levies goes towards funding the production of renewable energy across the UK - this reduces emissions, but increases the price of electricity. 

UK Electricity Bill Breakdown 

All data is derived from Ofgem's Data Portal.

• Wholesale costs: 29.28%

This includes the cost of the raw commodity, alongside energy losses during travel from generator to the customer. Also, imbalance costs are taken to account for supply and demand imbalances.

• Environmental taxes: 25.48%

The cost of supporting various government initiatives through the energy price.

• Network costs: 23.37%

This is the transportation of electricity across the transmission network and the local distribution network. Similar to wholesale costs, this also includes small balancing costs. 

• Operating costs: 16.34%

This is the cost of actually delivering the supply to the customer. This includes the cost of metering, the provision of the meter and the reading and data-handling responsibilities. 

• VAT: 4.76%

The cost of additional government taxes on the energy price, including VAT and the Climate Change Levy.

• Other direct costs: 2.09%

Let's break it down further...

If we look at wholesale cost alone, electricity is actually cheaper than gas. This is mainly due to the environmental taxes that are applied to it. Even though electricity is the most environmentally friendly option, electricity uses more renewable technology from wind and solar sources, meaning these charges are applied to it rather than gas. 

Is electricity going to get more expensive? 

It's unlikely that prices on standard variable tariffs will rise again in 2022 - this is because the price cap has been frozen at £2500 for six months from October 2022. 

At Access Training, we train our Gas and Electric Engineers for a sustainable future

We believe in quality trade education that lasts, for the peace of mind of our students and any customers that they work for in the future. Take a look at our range of electric and gas courses and get in touch at 0800 345 7492 to contribute to a more energy-efficient future.

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