UK Electricity Prices

Lord Whitehead Excerpts

Thursday 4th June 2026 Grand Committee

[The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)]

My Lords, I congratulate the noble Lord, Lord Lilley, on securing this debate. It is a very important debate not just on our present energy crisis as a result of events in the Middle East but to review, among other things, how the energy market has developed in the UK over a long time and what has gone into it.

I, maybe naively, constructed my remarks on the basis of the Question, which addresses why the UK has among the highest energy electricity costs in the OECD area. That is undoubtedly true, although we need to make a number of caveats about how different countries manage their energy markets. Looking at other countries is significant in that respect.

However, I am sorry, but not surprised, that the debate this afternoon has been on a much wider basis. It would require all of us to get around the table for about three hours to talk all these things out, and it would certainly take me more than the 10 minutes that I have this afternoon to remotely address all the points that have been made.

As a general point, I had wanted with my closing speech to address what is being done now about a number of things which I think between us we can agree have been problems and distortions in the UK energy market over a number of years, which need rectifying in the future. But—this is where we come to fairy tales—we know that climate change is real and not a fairy tale. We cannot address the problems and difficulties of the UK energy market and its prices without factoring in what we are doing about climate change. Otherwise, the best thing to do would presumably be to dig a whole load more coal mines and start coal mining again. In our situation, we have to deal with climate change as a central part of our energy economy.

We do that on the basis of a UK energy system in which, for example, more than half of the CCGTs presently in operation are likely to go out of commission within the next few years—a maximum of 10 years, because they are beyond their lives. That is real; it is not a fairy tale. As the noble Lord, Lord Moynihan of Chelsea, informed us, we have a grid system that is completely clapped out and was originally built for an entirely different energy system—not a modern energy system based on climate change and delivering things where they need to go. Whatever the situation, we would have put a great deal of effort in replacing the grid, so that it is up to modern standards and purposes, particularly as far as digitalisation is concern. That is not a fairy tale either.

As the noble Earl, Lord Russell, mentioned, it is also not a fairy tale that, as it works at the moment, the system is based on marginal cost pricing. That means that whatever you do in terms of cheaper power in the system, the most expensive element of the system when the bidding process comes in is the one that sets the marginal cost for the entire system. That marginal cost price is still dominated by gas—marginally less so than previously, but it is still a very long way from being resolved.

None of these is a fairy tale. These are things we have to address now with the energy system that we have. I think it was again the noble Lord, Lord Moynihan of Chelsea, who mentioned that one of the early mistakes that the previous Government made was to generate low-carbon power on the basis of the renewable obligation system, which gives rewards to the 30% of the system still run by renewable obligation-based energy over and above what you would expect it to get because of the volatile price of gas going into the system. But we have it in the system and we have to deal with it. What do we do about it? How do we get those elements out of the system and get a system that really reflects the cheapness of the power coming out of it for the future?

When we look at other energy markets, one answer to these questions is that various other countries are not exposed to those marginal prices and the gas input of 30% or so into the UK system that we are. In France and Canada, for example, it is only a few per cent based on gas. Even in Germany, there is a higher proportion but it is still much lower than us. People may like to say that this is what I would say this afternoon, but it is overwhelmingly the case that the present high electricity prices in the UK market are based on our being very high users of gas in the system to create electricity, and therefore our costs in the system go along with the volatility and changing prices of gas.

There are two more non-fairy tales, of course: the invasion of Ukraine and the situation in the Middle East at the moment. It is true that gas prices have come down a little since the peaks during the invasion of Ukraine, but they are still considerably higher than they were before it. That is the system we are dealing with at the moment.

What are we trying to do to deal with that? First, we have to make sure we get off gas in the system. Part of the mission to achieve clean power by 2030 and accelerate net zero is to place gas on the margins of the system so that it produces a relatively small amount, as has been stated, backing up the system rather than being a central part of it as a whole.

We have indeed brought in price caps, as noble Lords will know, to ensure that price rises are kept in check over a period. The Government never said that energy bills would all come down as a result of price caps or as a result of the transfer of some of the legacy things, such as the renewables obligation or the energy company obligation, away from levies and into the Exchequer. We did not say that would necessarily bring down bills; we said it would make sure those bills would go up rather less than they would otherwise. That is not a fairy tale but an actual fact—that is what has happened with, for example, the reduction in the Ofgem April price cap and the effect on the price cap coming up fairly shortly.

As noble Lords have mentioned, the Government are trying to make sure that prices come down for the industry. Mention has been made of the supercharger, which will cut businesses’ electricity costs by up to £420 million per year, which particularly relates to discounts on electricity network charges for businesses in sectors such as steel, cement and chemicals from 60% to 90%. That will make a real difference.

The Chancellor also announced in April that the Government will cut electricity bills by up to 25% for over 10,000 manufacturers from April 2027 through the British industrial competitiveness scheme. We are working hard to make sure that there is downward pressure on those bills, both domestic and industrial, through the moves that we are making against the background of the electricity system we have at the moment. At the same time, we have to tackle the structural problems that we have in the electricity system for the longer term. It is not just a question of putting more renewables on to the system; it is a question of revising the whole system so that the benefits of those renewables and low carbons come through and that the things that are a cost to the system go to the margins. That is why we are seeking to delink the cost of electricity from management by gas, particularly by taking action against the renewable obligation bodies that still make up quite a considerable portion of the energy market. We think that will produce a considerable reduction in the hold that gas has over the market over the next period. There will be fixed-price contracts for eligible generators, and we will be delinking from gas prices and protecting consumers from future crises.

I am aware that, as I had predicted, I have not been able to take in the entire sweep of this afternoon’s debate in one go. I warmly hope that the noble Lord, Lord Lilley, will secure a further two or three debates so that we can debate a number of the other issues.

To conclude, the Government are determined that families and businesses cannot be left at the mercy of volatile fossil fuel markets on an international basis. That is why we must press on with the transition not just for climate change purposes but for the good management purposes of having secure, homegrown power that will ultimately bring bills down for good.