Energy bills set to increase despite falling wholesale costs
British households will see their energy bills rise in the new year despite falling wholesale energy costs, as the energy minister concedes there is no quick solution to bringing down prices.
The energy regulator Ofgem has announced that the average annual dual fuel bill will increase by 0.2% in January, rising from £1,755 to £1,758 per year. This comes despite major forecasters Cornwall Insight having predicted a 1% reduction.
Government struggles to deliver on election promises
Energy minister Michael Shanks has admitted that Labour's election pledge to cut bills by £300 through converting the UK to clean power has not been delivered. Speaking to Sky News, Mr Shanks stated: "The truth is, we do have to build that infrastructure in order to remove the volatility of fossil fuels from people's bills."
He added: "We obviously hope that that will happen as quickly as possible, but there's no shortcut to this, and there's not an easy solution to building the clean power system that brings down bills."
The comments come as Chancellor Rachel Reeves considers ways to ease pressure on households in next week's budget, with energy bills remaining around 35% higher than before Russia's invasion of Ukraine in 2022.
Renewable energy costs driving bill increases
Despite renewable sources providing more than 50% of UK electricity last year, the costs associated with building clean energy infrastructure are contributing to higher bills. The UK currently has the second-highest domestic electricity prices and the highest industrial electricity prices among developed nations.
The price of subsidising offshore wind and managing the grid has increased sharply, driven by supply chain inflation and higher financing costs for major projects. In response, the government has had to:
- Increase maximum prices for offshore wind by more than 10%
- Extend price guarantees from 15 to 20 years
- Add new nuclear power generation costs to bills from January
Renewable subsidies and network costs now make up more than a third of energy bills and are expected to continue growing.
Gas remains crucial despite renewable expansion
Gas-fired power stations remain central to the UK's energy network, with around 50 active facilities supporting the increasingly renewable grid. Michael Lewis, chief executive of Uniper, explained the challenge: "The fundamental problem is we cannot store electricity in very large volumes, and so we have to have these plants ready to generate when customers need it."
He suggested that removing policy costs from energy bills and transferring them to general taxation could provide short-term relief, but emphasised that gas prices remain the fundamental driver of energy costs.
The government has also increased social costs funded through bills, including the warm home discount which provides £150 payments to approximately six million of the least-affluent households.
As the political consensus on net zero fractures, with both Conservatives and Reform UK criticising green energy policies, the government faces mounting pressure to address the energy cost crisis while maintaining its commitment to clean power by 2030.
