In this video, Shayan Ratnasingam breaks down the components of your electricity bill. He explains what we each pay for wholesale costs, network costs, environmental and poly levies, supplier operating costs and VAT.

The transcript is below

Three months into the US-Israel war in Iran, energy regulator Ofgem announced a 13% (or £221) increase in the energy price cap to £1,862 for the July to September 2026 period.

Customers will see a modest 5% rise on electricity bills compared to a 24% spike for gas. This divergence reflects the UK’s increasing volume of renewable generation, which reduces our reliance on gas for electricity and somewhat vindicates the clean energy transition.

Currently, UK wholesale gas prices are ~60% higher than they were pre-conflict, while electricity wholesale prices are only about 15% higher.

This brings us to our core focus today: UK electricity bills and what drives them.

While electricity is the dominant topic in energy transition debates, it currently accounts for only ~20% of the UK’s total final energy demand/consumption. The rest is comprised of direct transport fuels and natural gas for heating.

Because these sectors still rely heavily on fossil fuels, their eventual electrification is the primary driver of future power demand.

The National Energy System Operator (NESO) forecasts electricity demand to grow 11% to 2030 (to 287 TWh).

Today, 50% of our electricity demand is met by renewables, 1/3 by gas, 11% by nuclear, and the remainder by imports and biomass. Yet, the UK historically suffers from some of the highest electricity prices compared to our European peers.

To understand why, we need to unpack exactly what makes up a consumer's bill.

So what's actually in your electricity bill? It breaks down roughly like this:

• ~1/3 wholesale cost of electricity
• ~1/3 network costs
• ~20% environmental and policy levies
• The remainder: supplier operating costs and VAT

Let me take each in turn.

Unpacking your electricity bill: 1/3 wholesale costs

Roughly one-third of a typical UK electricity bill is determined by the wholesale cost of electricity. The UK wholesale market operates on a national marginal pricing system. In this "pay-as-cleared" setup, generators submit bids based on their cost of production + profit margin and is ranked from cheapest (like wind, solar, and nuclear at near-zero marginal cost) to the most expensive, typically gas-fired peaking plants.

Generation is called upon in this "merit order" until demand is met, and everyone receives the price of the final, most expensive unit needed to clear the market. Because gas is flexible and frequently used to fill supply gaps, it often sets the market price for everyone, even though it only supplies a third of electricity demand.

Furthermore, wholesale costs incorporate carbon taxes:

• The UK Emissions Trading Scheme (UK ETS) cap-and-trade system.
• The Carbon Price Support (CPS), a top-up tax on fossil fuels.

Renewable generators, which are zero emission emitters, benefit indirectly from carbon pricing, as gas-fired power plants (typically the marginal price setter), embeds these costs into electricity prices. Together, these carbon costs account for roughly 30% of the wholesale price. This, however, creates an asymmetric carbon taxation problem. Large-scale electricity generators pass these carbon penalties down to power consumers, while natural gas burned directly for domestic home heating has historically escaped equivalent environmental penalties.

Breaking the link with gas

In April of this year, the government announced its intention to "break the link" between gas and electricity prices. Rather than a radical structural overhaul, this arrived as a series of incremental steps:

• Extending the Electricity Generator Levy (EGL) on excess profits.
• Moving older wind and solar farms onto a voluntary fixed-price contract scheme so their earnings no longer track volatile gas prices.
• Removing the Carbon Price Support tax which also aligns our carbon tax system closer with Europe.

Gas will still be critical during this transition. It is expected to meet just 5% of our electricity demand by the 2030s, down from a third today. However, its role will shift strictly to providing flexible back-up for intermittent renewables. Because we will maintain the same 35 GW of gas capacity but run it less often, running these plants will become structurally more expensive per unit of energy generated.

Fortunately, gas and electricity are already decoupling. In the early 2020s, gas set the power price 90% of the time. Today, that is closer to 60%. This shift reflects that more than a quarter of Britain’s wind and solar capacity has been built since the last energy crisis. Forecasts expect gas influence on electricity prices could drop to 15% in the 2030’s as more renewables and nuclear come online.

The real decoupling is happening organically through investment and system evolution, not just ad-hoc policy decisions.

Unpacking your electricity bill: 2/3 Non-Commodity Costs

The remaining two-thirds of a consumer bill consists of "non-commodity" costs: network fees, policy subsidies, operating costs, and VAT.

1. Network Costs (1/3 of total bill) reflects the system cost to build and maintain the infrastructure required to deliver electricity effectively. The system cost of a renewable energy system is different to a fossils-based system as renewables are more distributed, and so require more infrastructure to transport the electricity, as well as storage to deliver the electricity, and surplus capacity over peak demand to meet intermittency challenges.

This includes ‘Transmission infrastructure’ such as the big subsea cables and pylons that transports electricity over long distances, and ‘Distribution infrastructure’ which represents the last mile network to the home.

The networks regulator, Ofgem, has approved up to £90 billion in network investment over the next five years. This involves building twice as much transmission capacity in the next five years than we did in the entire last decade. This marks the largest grid upgrade in 70 years. While this grid expansion adds roughly £60 to an average bill, it is expected to reduce system constraints by £50 in 2031, leaving a net bill impact of around £10.

A smaller network cost but which attracts an outsized level of media coverage is balancing costs (<5% bills). The balancing costs are those expenses associated with balancing real-time supply with demand when it deviates from forecast, while a lot of capacity is secured ahead of time the Balancing Mechanism deals with intraday gaps. 60-70% of costs are driven by "thermal constraints", for example paying windfarms in Scotland to turn off because our current infrastructure lacks the capacity to transport that cheap power south, while paying expensive gas plants in England to fire up. Network reinforcement remains our best lever to eliminate these inefficiencies.

2. Policy Costs (20% of total bill)

This covers the environmental and social subsidies that funded our renewable transition, including legacy Renewable Obligation Certificates (ROCs), newer Contracts for Difference (CfDs), and the upcoming Sizewell C levies. The renewable Obligation Scheme has supported the roll-out of ~35GW of renewable capacity equivalent to 1/3 of UK electricity supply today and the newer CfD scheme has procured >50GW over 7 auctions.

The policy costs of the energy transition are asymmetrically allocated between electricity and gas.

Electricity bills carry much heavier environmental levies to fund renewable power, whereas gas bills are primarily focused on heating efficiency and direct social support (Green gas levy to fund biomethane production, Energy Company Obligation (ECO) fund upgrades and Warm home discount)

3. Operating Costs & Supplier Margins

This covers supplier overheads, bad debt, and mandated energy efficiency installations for low-income homes. Crucially, since 2019, supplier retail profit margins have been capped at just 1.9%. The massive windfall profits often reported in the media belong to upstream oil and gas producers, not the retail utilities managing domestic accounts.

The retail reality and the trilemma

We must differentiate between the wholesale price of electricity and the delivered retail cost to consumers. While wholesale energy costs are projected to stabilize or decline toward 2030 as renewables scale up, network charges are rising rapidly to fund the grid buildout.

Consequently, retail bills will not fall as quickly as the wholesale forecast price suggest. Last winter, the CEOs of six major energy companies, representing 90% of UK supply, testified to ministers that even if wholesale prices were significantly reduced, domestic electricity bills would still rise into 2030 under the burden of policy costs leveraged on electricity prices.

This paradox is worsened by a declining demand story. UK electricity demand has fallen by nearly a fifth since 2000 due to de-industrialisation, energy efficiency improvements (lighting and appliances), and post-Ukraine behavioural changes. Today, demand sits 5% below pre-COVID levels. Yet we are building infrastructure to meet forecasted demand growth and looking to connect an additional 100GW of capacity to network by 2030. So, when demand is falling/stable there is a bigger burden placed on smaller shoulders especially when we don’t have large industrial activity absorbing the excess capacity.

This dynamic directly feeds into the UK's disproportionately high "spark spread”. This is the ratio of how much more expensive a unit of electricity (KWh) is compared to the cost of the natural gas needed to produce that electricity.

Under the Q1 2026 price cap, electricity was 4.7 times more expensive than gas. Following the 2025 Autumn Budget decision to shift 75% of legacy Renewable Obligation costs to general taxation and increasing renewable penetration, this gap reduced to 3.6x in the July 2026 price cap.

Though the gap is closing, it remains elevated compared to our European peers and a large contributing factor to the UK’s spark spread reflects decarbonisation policies which were funded through electricity-only levies.

However, the direction of travel is clear. The UK economy is electrifying and a large part of our energy demand still comes from fossil fuels which should underpin demand.

The fundamental question for policymakers remains: where should the burden of these transition costs sit?

Should the network costs be placed on asset owners connecting distributed and intermittent generation?

Should environmental and social subsidies move to general taxation to lower electricity bills at the expense of higher income taxes, or be shifted onto gas?

These challenges underpin the energy trilemma balancing energy security and sustainability with affordability.

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