British households paid the fourth-highest electricity prices in the European Union in the second half of last year, despite the government's announcement that it will cut VAT on domestic electricity from 5% to zero this October. The move is intended to ease the cost of living, but analysts point to three structural factors that keep UK power bills among the highest in Europe.
The first is the wholesale pricing mechanism. The price energy suppliers pay for electricity is set by a bidding process: each generating company states what it would accept to produce one unit. Renewables like wind and solar, once built, have low costs and tend to bid cheapest. Nuclear comes next. Gas generators, which must buy fuel and pay a carbon price for emissions, often have the highest costs. Crucially, the wholesale price is determined by the last unit needed to meet demand – meaning even if gas supplies only 1% of electricity at a given time, it can set the overall price paid to all generators. That pushes up household bills, particularly because the wars in Iran and Ukraine have increased the cost of gas.
“British households paid fourth-highest electricity prices in Europe; pricing system, gas reliance, and grid costs keep bills high.”
Second, the UK generates a relatively high share of its electricity from natural gas – 31% in 2025. This compares with just 3% in France, where 69% of electricity comes from nuclear power. The US generates 40% of its electricity from gas, but American wholesale prices are considerably lower thanks to a shale gas production boom over the past 20 years. The wholesale energy costs contribution to a typical British household bill rose from £311 in 2024-25 to £320 in 2025-26.
Third, state subsidies and grid investment costs have been added to bills in recent years. Subsidies encourage private firms to build wind and solar farms, while network costs – driven by the need to expand and modernise the grid to transmit power from new renewable sites to homes and businesses – have been passed on to consumers by previous governments. (Northern Ireland operates on a separate system, as part of the Single Electricity Market with the Republic of Ireland.)
The VAT cut will offer some relief from October, but the underlying drivers – a pricing system that lets expensive gas set the benchmark, heavy reliance on imported gas, and rising infrastructure costs – mean British households are likely to continue paying a premium for power.