The future of UK energy bills

The Middle East conflict risks sparking a renewed affordability crisis 

The ongoing conflict in the Gulf has led to a sharp rise in gas prices across the globe. For example, the NBP one-month forward gas future price, a key benchmark for UK gas prices, has risen by over 50% since the start of the year. Energy consumers in the UK are particularly exposed: gas sets the UK wholesale electricity price around 60% of the time according to DESNZ, and almost 90% of households in England use gas as the main method for heating their homes. As a result of higher wholesale prices, Ofgem announced a 13% quarter-on-quarter increase in the July price cap last week. In time, the expansion of renewables under the government’s Clean Power 2030 Action Plan should reduce volatility. But in the short term, the current crisis has renewed focus on the future evolution of energy bills.  

Which factors influence energy bills? 

Taking a step back, even in the absence of major geopolitical instability, the future of energy bills would still be highly uncertain. This point becomes apparent once we analyse some of the different components of energy bills (based on the Ofgem price cap for household bills):¹ 

• Wholesale costs (~36% of the current price cap) capture the costs of purchasing gas and generating electricity. They are subject not only to global energy prices, but also to uncertainties regarding future energy system pathways. According to the National Energy System Operator (NESO), for example, the government’s Clean Power 2030 target can be consistent with systems where gas sets the electricity price as little as 15% or as much as 47% of the time. 

• Network costs (~25% of the current cap) cover the costs of developing and maintaining energy network infrastructure, as well as electricity market balancing and constraint costs. They are exposed to both supply chain inflation and changes in borrowing costs. Out of the projected £70bn of investments over the five years to 2031 for the electricity transmission sector in Ofgem’s latest RIIO-3 price controls for energy networks, over £20bn sits in re-opener schemes, which means large shares of these projects’ costs may be revised in response to changes in market conditions. Future constraint costs are heavily influenced by delays to critical network projects (according to NESO, a delay in three such projects could raise constraint costs in 2030 by around £4bn). 

• Retail costs (~20% of the current cap) include supplier operating costs and profit margins. While these costs have generally been a relatively stable component of bills, they have come under significant pressure over the past few years as higher levels of customer debt have driven up retailers’ debt-related costs.   

• Policy costs (15% of the current cap) cover the costs of government environmental and social schemes such as Contracts for Difference and the Warm Home Discount Scheme. They can be unpredictable, as shown by the Budget 2025 decisions to end the Energy Company Obligation scheme and to partially fund the Renewables Obligation scheme through the Treasury for a period of three years ending in April 2029. 

• VAT on household energy bills is charged at a reduced rate of 5%, while non-domestic consumers and public EV charging are subject to the standard 20% VAT rate (reclaimable as input VAT for VAT-registered businesses). 

The level and volatility of energy bills can significantly impact business planning 

Higher gas prices will raise energy bills over the coming months, as they feed into Ofgem’s price cap and into fixed contract renewals. Households and businesses will also be affected by future changes in network, retail, and policy costs. Going forward, businesses will also be affected by the indirect economic impacts of higher bills on others as they feed through into economy-wide inflation, aggregate demand, and the economy’s supply-side potential.  

Investment and hiring decisions for businesses are made difficult not only because of global and domestic uncertainties, but also because of the lack of an independent, transparent, and reliable set of public bill forecasts – especially at a time when different groups present very different narratives about the future path of bills. Some external analysts have tried to fill the gap left by the lack of an official forecast, but doing so is complicated. For example, changes in one part of the system can have significant knock-on effects on others, so a system-wide approach is required to capture these interactions properly.  

The way system costs translate into bills is also far from straightforward – business network charges vary depending on factors such as location, connection voltage, and usage hours. For instance, to use the transmission network, businesses in the South must pay a Transmission Network Use of System (TNUoS) demand charge that is linked to their demand during peak periods. Businesses in the North effectively do not pay such a charge (because their demand can alleviate constraint costs because they are located closer to the wind generation that NESO asks to switch off). Meanwhile Distribution Use of System (DUoS) unit rates, charges that cover some of the costs of using the distribution network, also vary considerably across days and regions. Adding to this complexity, ongoing major programmes such as the Energy System Costs Allocation and Recovery Review and Reformed National Pricing (RNP) make it increasingly likely that the way businesses are charged for energy will change. 

The picture is made even more complex because policymakers will consider the impacts of their decisions across an array of outcomes. Some key dimensions include affordability, decarbonisation efforts, and economic growth. In practice, there are often trade-offs between those outcomes. The government’s recently expanded British Industrial Competitiveness Scheme (BICS), for example, supports industrial competitiveness for some businesses with the cost passed on in higher bills for others. Similarly, many calls for policy costs to be transferred from electricity to gas to encourage low-carbon technology adoption have faltered because they would also make winter heating more expensive for gas boiler users.  

How Flint’s energy modelling and economic impact assessment can help 

Flint can help you analyse the impact of policies and regulatory decisions on both bills and across government’s broader objectives. In doing so, we bring an understanding of how government forecasters and regulators test evidence, weigh trade-offs, and make decisions under real-world constraints. We combine this with practical insight from across the value chain, having worked with generators, network operators and suppliers for whom charges may be a source of revenue, as well as with energy consumers for whom they are a cost to absorb or pass on.  

Our experience producing high-profile economic analysis within government underscores the importance of not only assessing the microeconomic impacts of individual policy measures, but also understanding the macroeconomic effects that large structural changes in energy markets can have on the wider economy. Our team can help you understand and demonstrate knock-on effects on economic growth, inflation and the public finances.  

Our modelling capabilities complement Flint’s policy and advocacy work, helping businesses not only understand what might happen to their bills, but also to test and design new policies interventions to advocate with government. Together, this allows us to quantify the impact of different policy options on bills, and to frame those impacts in a way that is credible, decision-useful and aligned with how policy is actually made.  

Get in touch if you’d like to discuss how Flint can help you. 

Authors

This blog was written by Manager Filippos Papasavvas, Director Tom Wickstead, Specialist Partner Andy King, and Partners Virginia Sentance and Rebecca Barnett. Filippos brings experience from Ofgem where he produced models that analysed the bill impacts of RIIO-3 and other regulatory decisions. Tom brings experience modelling the economic and public finance impact of policy measures from roles at the Treasury and Office for Budget Responsibility. Andy and Virginia lead Flint’s energy and climate policy, modelling, and analysis offer, delivering impactful outcomes on climate, energy and sustainability policy. Rebecca leads Flint’s energy practice, helping clients understand and manage political, policy and regulatory risks and opportunities faced by businesses operating in the energy sector.  

Footnotes

1. Our breakdown here categorises Contracts for Difference (CfD), Capacity Market, Carbon Price Support and UK Emissions Trading Scheme costs as policy instead of wholesale costs, as they reflect the cost of specific government schemes. Doing so, reduces the estimated wholesale cost share of a typical dual fuel bill from Ofgem’s 45% to 36% and increases the policy cost share from 6% to 15%.

References

1. DESNZ, Reformed National Pricing (RNP): delivery plan 
2. HM Treasury, Budget 2025 
3. Ofgem, Costs in the energy price cap 
4. Ofgem, Debt and arrears indicators 
5. Ofgem, Energy price cap will rise by 13% from July 
6. Ofgem, Energy system cost allocation and recovery review 
7. Ofgem, RIIO-3 Final Determinations – electricity transmission 
8. Ofgem, RIIO-3 Final Determinations impact assessment 
9. ONS, English Housing Survey 2023 to 2024: low carbon technologies in English homes 
10. NESO, Clean Power 2030: advice on achieving clean power for Great Britain by 2030 
11. NESO, 2025 Annual Balancing Costs Report 
12. NESO, What are constraints payments? 
13. UK Government, Clean Power 2030 Action Plan: a new era for clean energy 
14. UK Government, Decisive action to break influence of gas on electricity prices