Are UK electricity prices so high because of the private sector?
This is Part 1 of a series on UK electricity prices and domestic energy policy.
Today, the Labour Party announced its flagship climate policy, “Great British Energy”, which will be a state-owned energy firm that optimistically lowers power bills and supports British jobs. The UK’s energy market is one of the most privatised in Europe, and their argument is that a state-owned enterprise will lower costs for consumers. This may be because government-run entities have a lower cost of capital, lower profit requirements, and return any profits to taxpayers. But is private ownership really the cause of the UK’s high electricity prices?
Across Europe, electricity prices were rocked by the Ukraine war in early 2022. Energy prices were rising even in late 2021, as much of European energy consumption relies on gas, and Russia’s depleting gas storage made markets nervous that there would be a shortage. Prices have since come down in the UK and elsewhere, but governments would ideally like to prevent such price shocks in future through a more secure power supply, better predictability, and lower prices.
It's also true that the UK has expensive power. In 2021, pre-energy crisis, the UK had the second highest industrial energy prices in Europe[1]. In 2020, the last available like-for-like comparison to the EU on Eurostat, the UK’s domestic prices were also above average, at €0.22/kWh versus €0.20/kWh median. Since then, UK domestic prices have risen dramatically, with variable rates 77% higher in 2023 than in 2020.
Electricity prices for industrial and retail customers by country, Euros per kWh
Source: Eurostat, UK DESNZ
Tax is a major driver of prices in Europe, yet this does not explain the UK’s situation. Tax as a proportion of UK electricity bills is relatively low, at ~4% for industrial bills and ~30% for retail. Other countries in Europe, like Germany and the Netherlands, charge significantly higher taxes for industrial customers, and still have lower prices than the UK.
Tax as percentage of total energy price, by country (2021, except for UK retail using 2020)
Source: Eurostat, UK DESNZ
Blaming high prices as a problem with private sector ownership is tricky. The UK privatised its power sector in the 1990s, and since then, prices have risen. But, they have risen everywhere. The UK’s industrial power prices tracked relatively closely to the International Energy Agency’s median country power prices up until 2010, and both grew at 5% per year from 1979 to 2022.
Industrial electricity prices, UK and IEA Average
Source: UK DESNZ
Other sources of variation between the UK power grid and Europe’s seem like more likely culprits than who owns the electricity assets. Examples include different generation mixes of renewables, higher dependency on gas imports, and lower interconnectivity than continental European countries.
In future posts, I will further explore the impact of private ownership on power prices, and explore whether other factors can explain the difference between the UK and the rest of Europe. I will also explain more about Labour’s GB Energy plan, the reason Labour supports public ownership of energy assets, the proposal’s merits and drawbacks, and suggested improvements.
[1] Data for industrial prices is from 2021. Italy and Sweden do not report in this year, so the latest available pre-2022 (2019 and 2020 respectively) was used. Data for domestic prices is from 2020, the last year in which the UK still reported prices to Eurostat.