The energy edit
www.nesta.org.uk/blog/the-energy-edit-3/
www.nesta.org.uk/blog/the-energy-edit-3/
Welcome to the third edition of Nesta’s energy edit.
Every six weeks Andrew Sissons - director, sustainable future - assesses the most important signals and trends underpinning the UK’s energy transition. Andrew is a specialist in climate change and economic growth, as a previous chief economist of the Environment Agency and civil servant in the Cabinet Office.
The energy edit is brought to you by Nesta, the UK's innovation foundation - focused on new solutions to society's biggest challenges.
2026 has been an incredibly busy year in the world of energy so far. I’ve spent a lot of time recently focusing on the energy crisis. We put out a paper recently on how to respond to the energy crisis, focused on efficiency, electrification and using the crisis to fix the problems with energy bills for the long term.
It’s that last part - lowering bills in the long term - I’m going to look at in this newsletter. But instead of focusing on the energy crisis part of the question, I want to look at the other things we should be doing to make electricity cheaper.
Britain desperately needs to make electricity cheaper, both in absolute terms and relative to gas. There are broadly four ways to do this.
First, weaken the link between gas and electricity prices, by building enough clean power that gas power plants are rarely needed.
Second, remove or shift the various levies that are added to electricity bills (and, for the most part, not to gas bills).
Third, reduce the fixed costs - of building clean power generation and upgrading the network - that now dominate the cost of electricity.
Fourth, take full advantage of the periods of cheap, excess energy that a renewables-led electricity system creates by enabling greater flex in energy demand.
The UK government’s response has so far focused heavily on the first – with a big push on its Clean Power 2030 (CP2030) mission – and begun to tackle the second of these opportunities.
The most important impact of Ed Miliband’s CP2030 mission may be that it rapidly reduces the role of gas in our electricity system. We are already beginning to see more frequent periods where gas is barely needed on the GB electricity grid and we’re likely to see many more of those on sunny days this summer. During an energy crisis where gas prices have spiked, this approach looks especially effective.
On levies, the second opportunity, the government made an important first step by removing £2.3 billion of levies from consumer bills from April 2026 (while also, more controversially, removing the Energy Company Obligation (ECO) levy). There is more to do, but this was the biggest action on levies any UK government has taken.
But on the other opportunities - fixed costs and flex - there is much more to do.
Fixed costs are increasingly important in our electricity system - renewables are all about investing upfront in return for a very low marginal cost of power. Unfortunately, fixed costs have been rising, particularly network costs.
The chart below shows how the main components of an electricity bill have changed in real terms since 2017. Wholesale costs remain the key driver of bill increases - driven mainly by gas costs, but also Contracts for Difference (CfDs), the capacity market and new nuclear to some extent. However, network costs also jumped sharply after 2020, even when adjusting for inflation. Policy costs, meanwhile, are now below their 2017 level thanks to the UK government’s intervention in the November budget.
Wholesale and network costs have risen since 2020, but policy costs are now lower
Wholesale and network costs have risen since 2020, but policy costs are now lower
What else could the government do to address rising fixed costs on electricity bills?
One is to try and lower the cost of capital for those building clean power and networks, using the firepower the government has given itself, including GB Energy and the National Wealth Fund. Another is to increase the amount of electricity we use, so that fixed costs are spread over more kilowatt hours. Ed Miliband’s recent comments on this, promising to “accelerate our efforts to drive electrification across the economy”, are encouraging in this regard.
Another option to reduce fixed costs in the long term is to focus more on the cheapest forms of new electricity generation: onshore wind and solar. Onshore wind (£72 in 2024 prices) and solar (£65) came in much cheaper than offshore wind (£91) in the most recent CfD auction.
The chart below shows how these renewable technologies combine with a new gas power plant commissioned in 2030. Even if we assume the gas power plant is used to its full capacity (it certainly would not be), it is still more expensive than offshore and onshore wind and solar. Even if we were to discount carbon costs altogether (we can’t), solar and onshore wind are still cheaper.
Even if a new gas plant ran at full capacity, it still costs more than onshore wind and solar
Even if a new gas plant ran at full capacity, it still costs more than onshore wind and solar
The Labour government made an important move to enable onshore wind and solar in England after many years of heavy restrictions and it should aim to bring through many more projects over the coming years. While onshore wind and solar have much lower capacity factors than offshore wind - that is, they generate less of the time - they have lower capital costs and should play an increasing role in the grid.
This leads on to the fourth opportunity to reduce electricity bills: making better use of periods of cheap, excess energy. While a renewables-led system is dominated by fixed costs, it also throws up regular periods of very low cost power.
This might seem like a paradox, but it tracks to the underlying structure of our renewables-led system. Network costs are partly driven by the cost of managing peaks, so shifting electricity demand away from those peaks is cheaper. CfDs are structured so that they don’t pay out during periods of sustained negative prices.
We are likely to see many more periods of excess electricity this summer, even in the teeth of an energy crisis. Those who have invested in electric vehicles, heat pumps and batteries should be able to make huge savings, if they have their software set up right. The more that the UK government and the energy system can engage households and get them to take advantage of these power gluts this summer - by shifting when they cook or do the laundry, by getting used to using more electricity when it is cheap - the bigger the opportunity to lower electricity costs in the long term.
An electricity system geared around investing enough to manage a high peak in electricity demand will be expensive. A system geared around lowering the peaks and making the most of the periods of excess power could be much cheaper - and we have a major opportunity to move in that direction.
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