Why are energy bills in Britain so high? Until recently, most of the energy industry has had a pretty simple answer to this question: because we rely heavily on gas, and gas is now expensive. 

Wholesale gas prices rose dramatically in 2022, and while they have fallen back since then, they have settled at a higher level than before the energy crisis. Because gas is so dominant in Britain’s energy system - most homes use gas for home heating, and we usually rely on gas power plants for the last bit of electricity we need - energy bills have risen. It is the wholesale price of energy - of actually buying gas and electricity itself - that has taken most of the blame for energy bill hikes.

Far less attention is given to the fact that other parts of energy bills - known as “non-commodity costs” - have also risen, and look set to rise further in future. Rachel Fletcher of Octopus Energy recently told MPs that she expected electricity bills to rise by around 20% in the next four or five years even if wholesale prices fall, because more and more fixed costs are landing on energy bills.

Some people have been quick to link these rising non-commodity costs to renewables and net zero. Clare Coutinho, the Shadow Energy Secretary, blamed the “soaring policy costs of renewables”. In reality, non-commodity costs are made up of lots of different costs, including subsidising older renewables, expanding the energy grid and funding social programmes. 

However they are framed though, these costs are undoubtedly rising. It is therefore worth asking whether we can still blame high energy bills on gas, or whether we need a new story.

Non-commodity costs describe everything on an energy bill that doesn’t involve buying wholesale energy (energy is the “commodity” here). They make up a majority of our energy bills, and have done for a long time, because getting energy into our homes is a complex task. The main non-commodity costs are network costs (building and running the power grid), operating costs (running energy businesses) and policy costs (levies that are added to bills for various environmental and social programmes). Among these, it is network costs and policy costs which have increased bills the most.

Policy costs can be defined in different ways. Ofgem’s price cap defines them purely as levies, with two main elements: the ongoing cost of subsidising early renewables schemes back in the 2010s (renewables obligation, feed-in-tariff); and the cost of social programmes to upgrade and offer discounts to low-income households (energy company obligation, Warm Homes discount). However, some analysts also include the cost of supporting newer generation, such as contracts for difference (CfDs, which offer fixed prices for some renewables and nuclear) and the capacity market (subsidies to gas plants and batteries to remain available as backups). We could also include some newly arriving costs, such as funding the building of new nuclear plants and subsidising technologies such as hydrogen and carbon capture, utilisation, and storage. Regardless of definition, it’s important to distinguish between these three categories of cost - legacy renewables, new clean energy generation and fuel poverty schemes - and recognise that they are all rising.

Network costs have three components: transmission (moving electricity from power plants to places), distribution (getting electricity into our homes) and balancing costs (making sure the grid always has just the right amount of power).

Since 2015, non-commodity costs on household electricity bills have roughly doubled in nominal terms, from around £260 for a typical household in 2015 to around £530 now. The wholesale cost of electricity has also roughly doubled over that period, taking the overall typical electricity bill from around £450 in 2015 to around £900 now.

There are four key reasons why these non-commodity costs have been rising: 

1. The UK government has added a range of extra policy costs to bills. 
2. Britain is greatly expanding its energy grid and building more clean energy generation, in preparation for electrifying its economy. 
3. The significant burst of inflation since 2021 (consumer prices have risen by 24%) has raised the cost of building and operating things, such as power plants and network infrastructure. 
4. Interest rates have risen significantly since 2022. Many of these non-commodity costs are highly capital-intensive, and increasing the cost of capital raises their cost significantly.

This looks, then, like a perfect storm. At the very moment Britain is aiming to expand its electricity grid and clean energy capacity, the costs of doing so have risen dramatically.

So when it comes to rising energy bills, are non-commodity costs, not gas, the problem we should be focusing on? 

Not quite: there are three things we should consider before we reach that conclusion.

1. Most of the increases in policy costs happened before 2020

Policy costs on electricity bills have increased a lot, and this is a problem; indeed, Nesta has spent a lot of time arguing to remove as many policy costs from electricity bills as possible.

However, most of the increases in policy costs did not happen recently. A big share of the policy costs on bills are legacy costs; they reflect the cost of early support to the renewable industry to reduce costs. Renewables Obligation and Feed-in-Tariff mostly came on to bills in the 2010s, and will largely disappear from bills when these contracts end in the 2030s. 

The chart breaks down the sources of increases in the electricity bill between 2015 and 2020 and 2020 to 2025, adjusted for inflation. It shows that, while subsidies for renewables were the main source of electricity bill increases from 2015 to 2020, since then they have barely increased bills. Instead, it is wholesale costs and network costs that have contributed most to bill rises since 2020.

Meanwhile, most of the costs of contracts for difference (CfD) currently on bills are from the early round of auctions (Investment Contract, AR1 and AR2), where prices were high. The CfD auction process aimed to bring down prices, and it succeeded in this aim; CfDs from AR3 and AR4 will be substantially cheaper than earlier auctions when they enter bills. However, CfD costs for offshore wind have risen substantially since their lows in 2022 - partly due to inflation and higher interest rates. The AR6 auction in 2025 had a strike price for offshore wind that was similar to the strike price in AR2. Higher wholesale costs since 2022 have also dampened the growth in CfD costs.

The social element of policy costs have also risen in recent years. Both ECO and the Warm Homes discount have seen big increases recently, but it is also worth remembering that these programmes aim to lower bills for those most in need.

Policy costs may well grow again in future. For example, funding for new nuclear power plants will add around 0.5p/kWh to electricity bills at the next price cap, potentially growing further in time. But newer renewable energy will be cheaper than this, and much of the argument about policy costs is about things that happened last decade, not now. We can debate about where these legal policy costs should fall - we argue it should not be on electricity bills - but there is no legal way for the UK government to get rid of them altogether.

2. Higher network costs now should bring dividends in the future

Unlike policy costs, network costs have been growing steadily in recent years, and this increase is set to continue. For example, we expect transmission costs to rise by at least £40 for the typical home in the April 2026 price cap. 

While this partly reflects the rising cost of capital, materials and labour, it is also driven by a big increase in investment in our electricity grid. The total amount of electricity we consume is expected to more than double in the future, as we switch from using fossil fuels to electricity for transport, heating and industrial processes.

That increase in electricity demand should, in time, help to spread the higher fixed costs of the electricity system over more units of electricity, helping to lower costs. That is why, for example, the National Infrastructure Commission estimated that electricity distribution costs on a typical bill would only rise by £5 to £25 per year up to 2050, despite a massive increase in investment.

Balancing costs have also increased significantly in recent years, primarily due to constraints costs, which are paid to stop renewables from generating during periods of excess electricity. A key cause of constraint payments is limited capacity on the transmission grid, so upgrading the grid should lead to them eventually falling. NESO forecasts that constraint payments will rise until 2030 but fall after that.

The issue on network costs is primarily about investing now to get the benefits of more electricity in future. This means higher bills in the short term, which is painful. But we should be framing higher network costs as a transitional cost - and one the government should deal with as such - rather than a permanent cost.

3. Look at the full energy bill, not just electricity

All of the debate we’ve detailed so far has been about electricity bills. There is a good reason for this: electricity is the fuel of the future, and we need it to be cheap and plentiful. But most households in Britain do not just pay an electricity bill; they pay both an electricity and a gas bill. When we talk about energy bills, we normally mean this dual fuel bill.

When we look at what has driven the rise in dual fuel bills, it is clear that wholesale costs - the bit that is driven by high gas prices - is still the main culprit. Electricity bills may have growing non-commodity costs, but gas bill rises remain dominated by wholesale costs. This is one reason why we argue that Britain needs to stop using gas for home heating so urgently, and switch to cleaner electric heating.

When you look at it through this lens - the lens most households see it through - it is clear that gas is still the main source of our high energy bills to date. 

It is also important to remember the downward pressure that renewables put on wholesale energy prices. The low marginal costs of renewables help to reduce electricity spot prices, and increasingly lead to periods of very low or negative electricity prices. Analysis by the Energy and Climate Intelligence Unit recently showed how renewables help to reduce reliance on more expensive gas power plants, while modelling by researchers at UCL suggested British renewables had substantially reduced European gas prices since 2010. The 2022 energy crisis - which ultimately cost the UK government around £60 billion - would also have been worse without renewable energy and contracts for difference, and such crises could happen again in future.

None of this is to dismiss the issues with non-commodity costs, which have risen and will continue to rise. This is a genuine problem, and it is particularly serious because it raises the cost of electricity and makes it harder for us to escape our gas trap. What could the UK government do about it?

First, it should unload many of those policy costs from the electricity bill. It is counterproductive to load the cost of so many government policies onto the fuel you’re trying to get people to switch to. Whether that means rebalancing levies onto gas bills, removing them onto general taxation or finding other ways to finance them, the Treasury must take some of these policy costs off the electricity bill.

Second, it should do what it can to lower the cost of capital. Government can generally borrow money at a lower rate than private companies, and it has a range of tools - including GB Energy, the National Wealth Fund and its Public Sector Net Financial Liability fiscal rule - to take advantage of that. It should wherever it can. The government can also create more certainty for investors and streamline project pipelines to lower the cost of generating and transmitting electricity.

Third, it should consider whether the Exchequer should bear more of the transitional costs of upgrading the electricity system. The fiscal rules have space in theory to enable this, and our future selves will be better off with an upgraded electricity system, lower carbon emissions and an increase in government debt than they will with an energy transition that falls apart.

It is clear that we need to pay more attention to non-commodity costs on electricity bills, and to be honest about how they are rising and why. It is wrong to pin the blame solely on net zero, but it is also wrong to pretend that rebuilding our energy system has no costs, especially in the short term. The UK government should bear down on non-commodity costs wherever it can, and, just as importantly, try to shift them away from the electricity bill.

Nonetheless, it is still true that higher gas prices are the main reason for higher energy bills for most British households when you look at the whole bill. Gas is not the only culprit, but it is still the biggest one. The priority for British energy policy should still be to switch from gas to homegrown energy as quickly as possible, and tackling non-commodity costs to make electricity cheaper is a crucial part of doing that.