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(Bloomberg) — As U.K. temperatures drop and energy prices rise, a growing number of people are considering alternatives to expensive and polluting gas boilers for the first time. There’s just one problem: electricity in Britain is three times more expensive than natural gas, which makes efficient electrical appliances that can heat homes, dry clothes and charge cars prohibitively expensive.
The electricity-gas gap has narrowed in the UK over the past year: electricity was four times more than gas. But that’s only because energy prices are rising across the board, and Europe-wide shortages hamper any government hopes of making electricity prices more palatable in the near future.
“We need to demonstrate to people that heat pumps will be cheaper to run than gas boilers,” UK Minister for Business, Energy and Corporate Responsibility Martin Callanan told Bloomberg UK earlier this month. But now is a “politically difficult” time for energy reform, which will take “many years”.
The UK has no time to waste on a clean-energy transition: its goal is to reach net zero by 2050. But the uphill battle to bring down electricity prices is an indication of how complicated navigating that transition can be in practice.
1. How much does UK electricity cost?
Since 2019, a “price cap” administered by regulator Ofgem has set the maximum amount that energy companies are allowed to charge a household. But the cap, designed to protect consumers from suppliers charging more than the market rate, does not protect consumers from fluctuations in the market rate itself. When that price went up earlier this year, so did the cap and people’s utility bills – so the government intervened with an “energy price guarantee”. The guarantee, which runs until April 2024, sets electricity prices for consumers at 34p per kilowatt hour and gas at 10.3p per kilowatt hour. There is also a daily standing charge of 46p for electricity and 28p for gas.
The guarantee means the average household energy bill in the UK this year will be around £2,500 ($3,061). Most of that comes from the significant amount of gas used for heating and cooking, on average (around £1,300), but the per-unit price difference between gas and electricity makes using more electricity unattractive. A consumer research company, Kya? Analysis by suggests that the cost of heating a home with electricity is about twice as much as the cost of heating it with gas.
2. Why does electricity cost more than gas?
For the past decade, the UK’s investment in renewable energy, as well as subsidies for energy and insulation for poor households, has been charged to electricity bills rather than gas bills. Until recently, this was a big driver of price inequality: last summer, the levy accounted for a quarter of the average UK household’s electric bill. But as electricity prices rose, the levy’s share of the average bill fell to around 10% earlier this year, according to an analysis by the Energy and Climate Intelligence Unit.
A large part of the price of electricity is determined by what is known as “marginal cost” – the amount charged by the supplier to balance supply with demand. In the UK, this is, ironically, natural gas, which low-efficiency power plants can provide by firing at short notice. Essentially, using gas for electricity is more expensive than using it in a gas grid, boiler or oven. Transmission costs are also higher for electricity than for gas.
3. Why is this a problem?
The UK electricity grid was far more polluted than it is now. But over the past decade, renewable energy has replaced coal and other carbon-intensive fossil fuels. Britain is also now trying to wean itself off natural gas in an effort to meet climate targets.
About 85% of people currently heat their homes with gas boilers, for which the most widespread replacement may be the heat pump, a highly efficient form of electric heat that under ideal conditions produces three to four units of heat for every unit of electricity. . The government’s target is to install 600,000 new heat pumps per year by 2028.
But while heat pumps are more efficient than gas boilers, high electricity prices mean they are often not cheap to run at the moment. (They’re also more expensive up front.) Other types of electric heat, such as space heaters and electric radiators, are also affected by high electricity prices.
4. Can the UK set higher electricity prices?
Shifting the levy currently assessed on electric bills to gas bills will signal climate needs, making electricity cheaper and reducing gas prices at the same time. It will also track with government targets: in a heat and buildings strategy published last year, the Department for Business, Energy and Industrial Strategy (BEIS) said it would “shift or rebalance energy tariffs from electricity to gas this decade.”
Climate and energy groups are calling for this to happen sooner to promote the use of cleaner technologies such as heat pumps. And doing so now – while the government is paying for the recovery as part of its price guarantee – may be ideal, before the guarantee expires and electric bills come up again in April 2024.
Currently, the government is consulting on mechanisms by which it can double the price of gas from the wholesale price of electricity, and rule out a system that allows marginal suppliers to set the market price. But this won’t start until “mid-2020” at the earliest, according to the consultation.
Analysis by research agency Nesta suggests that the gap between electricity and natural gas prices will naturally narrow over time. As more renewable energy comes onto the grid, it will reduce the frequency with which gas power needs to be fired. However, moving the levy to a general tax or gas bill would make this happen much faster.
5. Why not charge gas anymore?
In short: because everything is already too expensive.
The European energy crisis has pushed up prices across the board, and making gas more expensive – even in the interest of clean-energy adoption – will add to the hardship for millions of Britons already suffering from fuel poverty this winter.
There is evidence that the UK is just planning to make this shift. Last year, the government said it would seek evidence on moving the levy on gas “with a view to making decisions in 2022”. But there is no sign of this review and no decision has been taken yet.
©2022 Bloomberg LP
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