The UK’s high electricity prices are here to stay. But could they offer an opportunity? |
Four years after Russia’s invasion of Ukraine, the world is bracing for another energy crisis. The US-Israel bombing of Iran and then the blockade of the strait of Hormuz have forced up the price of oil. The price of natural gas in Europe has also risen sharply.
In the UK, Prime Minister Keir Starmer has announced a £50 million package to support consumers who heat their homes with oil. The government is also considering a U-turn on the decision to increase fuel duty (currently almost 53p per litre of petrol or diesel) in September after a 15-year freeze. Other taxes would need to go up to compensate.
But the main question concerns what will happen to electricity prices this summer. A sustained crisis could push prices higher for both households and businesses. It could also push the Bank of England to avoid interest rate cuts, making mortgages more expensive. And the government could even end up paying part of everyone’s bills directly as it did between 2022 and 2024, piling up tens of billions of pounds of public debt.
To secure most of the future production of electricity – wind farms or new nuclear power stations for instance – the government signs what are known as “contracts for difference” with electricity producers. These contracts fix the price of electricity for decades, typically above expected wholesale prices.
These guaranteed prices correspond roughly to the expected average cost of........