Tag: Iran war

Article by Molly Lempriere, Dr Simon Evans republished from Carbon Brief under a CC license.

Energy bills in the UK have continued to soar in 2026, with intense debate raging about how to bring them down. 

In October 2026, the cap on household energy bills reached its highest level in three years, rising by £60 amid high gas prices driven by the Iran war.

The cap is forecast to jump by as much as another quarter in January 2027, pushing annual energy bills towards £2,200.

Energy bills have not been that high since 2022 when, in the fallout of the Russian invasion of Ukraine, the UK government spent more than £60bn on supporting consumers through the crisis.

While expensive gas is behind the lion’s share of the rise in bills since 2020, policy costs and investment in the gas and electricity grids are also putting some pressure on prices.

This has sparked conflicting calls to continue the clean-energy transition to get off the “fossil-fuel rollercoaster”, to move more slowly – or to abandon climate goals in favour of more gas.

Below, Carbon Brief looks at the real drivers of high energy bills in the UK, what has been done to address them to date and what options are available to cut them going forward.

These include taking more policy costs off electricity bills, boosting flexibility or shifting to more efficient technologies with lower running costs, such as heat pumps and electric vehicles (EVs).

• What is driving high energy bills?
• What has been done to limit bills so far?
• What options are there for bringing down bills?
• Is there a ‘cheap power’ alternative if the UK slows down?
• Can electrification of homes and businesses help cut bills?

What is driving high energy bills?

In October 2026, UK household energy bills reached their highest levels since 2022, with the price cap for typical homes hitting £1,723 per year, up 47% in real terms since October 2020.

Industrial energy users also face high costs, particularly for their electricity.

For households, another sharp increase is now all but guaranteed under the price cap for January 2027, which is forecast to rise by around 25% from current levels.

Wholesale costs for electricity and gas make up 44% of the current cap of £1,723 per year, according to Carbon Brief analysis of figures from thinktank Nesta, shown in the figure below.

The wholesale cost of both electricity and gas is tied to gas prices, due to the marginal pricing system used in power markets in the UK and most other countries.

Network charges make up a further 24% of bills and operating costs are another 17%, whereas policy costs only account for 7% of the total.

There has been increasing interest in the so-called “non-commodity costs” – those not related to wholesale energy – that now make up a significant portion of bills, as shown in the figure above.

Yet while these costs have been increasing – particularly those related to investing in energy networks – they are not the reason why energy bills have soared once again in recent months.

Indeed, Nesta analysis recently published by Carbon Brief shows that, contrary to widespread UK media and political narratives, a surge in wholesale costs driven by expensive gas is responsible for more than 80% of the rise in dual-fuel household energy bills since 2020, as shown below.

The second-largest driver of the rise in costs since 2020 is due to the cost of operating, maintaining and expanding gas and electricity networks, as shown in the figure above.

At the end of 2025, energy regulator Ofgem approved £29bn of upfront investment into the national gas and electricity grids, as well as the gas distribution network that connects to homes and businesses. This is part of a wider package of up to around £90bn of investment out to 2031.

As a result of these investment plans, network charges are expected to increase by around 50% between 2025 and 2030, from £222 a year to £330 for a typical dual-fuel household.

(This figure covers gas and electricity transmission and gas distribution, but not electricity distribution. A further package of increased investment in the electricity distribution network, for the period from 2028-2033, is due to be approved by Ofgem by the end of 2027.)Company

The increase in network costs is often attributed to the need to connect increasing levels of geographically dispersed renewable energy sources, particularly wind power.

However, a significant proportion of these increases relate to the need to update ageing infrastructure after decades of under-investment.

This package of investment represents a “once-in-a-generation renewal of our energy infrastructure”, Ofgem head Tim Jarvis told a recent conference attended by Carbon Brief.

Ofgem says some three-fifths of the £108 per household per year rise in network charges to 2030 is due to “business-as-usual” costs such as ongoing maintenance of the gas and electricity networks. It says only £30 is due to investing in expanding the electricity transmission grid.

Similarly, according to the Energy Networks Association, up to 80% of the investment in electricity grids is required to maintain existing assets, with the remainder going towards expansion.

Another point of contention is “constraint costs”, where windfarms are switched off if the network lacks the capacity to transmit their power – and gas plants are switched on to meet demand.

These costs sit within network balancing charges and – despite rising steeply in recent years, partly due to high gas prices – these still make up just £35, or 4% of typical annual electricity bills.

Today, rising constraint costs are partly a reflection of the decision in the 2010s to postpone network investments under a policy known as “connect and manage”. Ofgem says the investments it has now approved in the electricity grid would help limit constraints in the future.

Trade association RenewableUK’s head of policy Steven Agnew points to a recent review by the National Audit Office and says investment in the grid is “critical to avoid large rises in consumers’ bills as more of the country’s electricity is generated from clean sources”. He adds: 

“The current crunch is the result of inaction by successive previous governments to tackle this issue. Consumers are losing out on some of the benefits because low-cost wind has to be turned down and expensive gas turned up elsewhere.”

Projections from the National Energy System Operator (Neso) illustrate how constraint costs depend on the relative pace of expansion in new generating capacity and the electricity network.

It says balancing costs could rise from £2bn to £8bn by 2030, if the grid faces delays. However, its central projection is £3-4bn, with a range of options available to limit this increase.

Finally, following years of elevated energy bills, the cost of “bad debt” has increased. This is where unpaid bills are recovered by energy companies through a charge on all households.

These charges add around £60 to typical bills, according to Carbon Brief analysis of Ofgem data. This is an increase of around £40 since 2020 – more than half of the rise in “operating costs”. Trade association Energy UK says rising debt could add another £10-15 to bills by next year.

What has been done to limit bills so far?

The Labour government was elected in 2024 on a manifesto that pledged to cut bills by £300 per year by 2030, relative to levels in late 2023.

The government has taken a number of steps in this direction.

At the 2025 budget, it closed the “energy company obligation” (ECO) efficiency scheme and moved 75% of the “renewables obligation” support scheme for legacy renewables into general taxation.

Collectively, these two changes were expected to save a typical household £134 per year, or £154 when including households that use electric heating. (These savings only apply to households.)

Many groups, from industry to politicians, had long called for policy costs to be taken off electricity bills in an effort to bring down prices, but this had previously been resisted by the Treasury.

In addition, new prime minister Andy Burnham announced in July that his government would remove VAT from electricity bills for six months from 1 October, cutting bills by around £45.

Yet despite these efforts, bills have continued to increase.

Speaking to Carbon Brief, Dr Richard Carmichael, a researcher at the UK Energy Research Centre (UKERC) and research fellow at Imperial College London, says the impact of reducing policy costs and VAT has been “masked” by rising wholesale energy prices.

As a result, there are calls for the government to go even further in its efforts to reduce policy costs – or to take more radical steps to cut bills. (See: What are the options to bring down bills?)

One factor that is less well-appreciated is the impact that clean-power sources have already had on energy bills. Commentators tend to focus narrowly on the cost of support schemes for these projects, without considering the impact they have on the total cost of running the energy system.

Nesta research suggests that electricity bills are rising “much more slowly” than gas this year, despite the impact of the Hormuz crisis, due to the expansion of clean power. It says this is an early sign of electricity prices starting to “decouple” from gas prices.

In April, the government announced reforms that it hopes will help “break [the] link between gas and electricity prices, but analysts told Carbon Brief the impact was likely to be “modest”.

Nevertheless, the link between the two will continue to weaken as more wind and solar gets built, including projects supported by a record “contracts for difference” (CfD) auction earlier this year.

Since the start of the Iran war, the UK has avoided the need to import gas worth around £5.9bn as a result of record wind and solar output, according to previous Carbon Brief analysis.

RenewableUK’s Agnew tells Carbon Brief: “Put simply, every wind turbine we build is gas we don’t need to buy.”

In addition to directly displacing gas, the windfarms on the system cut wholesale power prices by around a third in 2025, according to the Energy and Climate Intelligence Unit (ECIU).

This is due to the “merit-order effect”, whereby windfarms push the most expensive gas plants off the system, reducing the average wholesale power price.

According to separate research published by University College London, UK wind energy cut consumer costs by a total of £104bn over 2010-2023, net of subsidy costs, through a combination of the merit-order effect and reduced gas demand, which lowered gas prices.

What options are there for bringing down bills?

With household and industrial prices remaining elevated for more than five years, countless ideas have been presented for bringing down the cost of energy.

These span from immediate but more modest tweaks that could have a rapid impact, through to longer-term changes in the energy system, the design of energy markets or retail tariffs.

Moreover, amid a collapse in the UK consensus, some politicians want climate goals to be abandoned in the name of cheaper energy. (See: Is there a ‘cheap power’ alternative if the UK slows down?)

Ahead of the budget on 28 October, the most widely shared request is for the chancellor to take more policy costs off electricity bills, either for households only, or for all energy users.

A September letter to the government from more than 120 trade bodies, businesses and charities calls for “hidden taxes” to be taken off energy bills for both businesses and households.

It argues that a series of levies should be paid out of general taxation, in addition to the existing decision to take 75% of renewables obligation costs off household electricity bills.

This would include a levy supporting the Sizewell C new nuclear plant, the cost of the warm home discount scheme for fuel-poor households and feed-in tariffs for small-scale legacy renewables.

The group says that removing these additional policy costs from bills would “bring the total average domestic energy bill reduction achieved by this government to as much as £250 a year”.

It adds that this would bring down inflation, boost manufacturing and incentivise investment in the electrification of the economy, helping to “fully realise [the UK’s] economic potential”.

Speaking to Carbon Brief, energy consultant Kate Mulvany says bringing policy costs and bad debt into general taxation is “in all likelihood the fastest route” to reducing bills.

The main barrier to removing further policy and debt costs from bills is that the money would have to come from somewhere else – most likely the Treasury, which has resisted this in the past.

The decision to take 75% of the renewables obligation off household bills is seen as a breakthrough, with Energy UK head Dhara Vyas saying the Treasury should go a “step further”.

Alternatively, a report from parliament’s Energy Security and Net Zero Committee calls for policy costs to be moved from electricity onto gas bills.

This would help “rebalance” the cost of electricity relative to gas, encouraging consumers to switch to more efficient electric technologies, such as heat pumps and electric cars.

This is because it would reduce the “spark gap”, the ratio between electricity and gas prices. This ratio stood at 4.3 in the UK as of April 2026, although it has dropped to 3.3 under the latest price cap and could fall again to 3.0 in January 2027, according to Carbon Brief analysis.

Further options to bring down costs for consumers have been suggested by groups including Nesta, the “electricity bills taskforce” and many others.

Ideas include the government paying off household energy debt, instead of recovering it through bills, a permanent removal of VAT on electricity prices and boosting electricity system “flexibility” so as to maximise the use of existing network assets.

Carmichael tells Carbon Brief:

“Flexibility is a fairly obvious one that…would deliver bill reductions for people who can participate in flexibility, but it would also reduce system costs for everyone.”

Ashutosh Padelkar, research lead at Aurora, agrees that there is “more work to be done on improving network efficiency”. In addition to boosting flexibility, he points to innovations such as “dynamic line ratings”, where cables can be “overloaded a bit for a small amount of time”.

With bills set to leap by around a quarter at the start of 2027, there have also been calls for specific measures to offer households relief at the budget.

Many argue that this support should be targeted to limit costs, for example through extending the “warm homes discount”. However, Mulvany warns that this could increase costs for other households if it is paid for via energy bills, as is currently the case for the warm homes discount.

Another option is to introduce a “social tariff” for fuel-poor households. Dr Carmichael notes that while this has some positives, it also has “potential for a sort of a cliff edge where people are just missing out on it”. This can make them challenging to put together in an equitable way. 

Meanwhile, the New Economics Foundation thinktank – where energy secretary Miatta Fahnbulleh used to work – suggests a “rising block tariff”, where consumers pay lower rates for a set amount of “essential” energy use. However, there are fears this could discourage electrification.

Ahead of the budget, Burnham has asked ministers to look at developing a plan to remove standing charges from gas bills. The idea was put forward by Nesta, which says it would save typical households £27 per year, while helping encourage the shift to heat pumps and EVs.

Finally, separate proposals from thinktank Common Wealth and consultancy Stonehaven with Greenpeace, call for more radical changes that would see gas-fired power stations taken into a strategic reserve, in order to more completely break the link between gas and power prices.

Is there a ‘cheap power’ alternative if the UK slows down?

Some groups argue that the UK needs a fundamental shift in its energy strategy in order to tackle high bills. Such calls are often based on the idea that the government is “rushing” to meet its target for clean power by 2030 – and that slowing down would cut costs.

For example, a September 2026 report from the Institute for Fiscal Studies (IFS) states that “continuing to push for rapid decarbonisation does risk increasing costs”.

Its argument rests on NESO modelling, published in 2024, which suggests it could be slightly cheaper to rely on more gas in 2030 than planned under the clean-power 2030 target.

Peter Levell, IFS deputy research director, tells Carbon Brief that gas prices have “risen significantly” since the NESO modelling was published, which “other things equal” would make it relatively cheaper to push for more renewables instead of relying on more gas power.

However, he adds that capital costs have also risen, arguing that this makes renewables relatively more expensive. (The cost of gas-fired power plants has risen even more steeply.) Levell adds that it is unclear how long the current disruption causing high gas prices will last.

Another prominent – and repeated – voice for slowing down the government’s push for clean power has come from the Tony Blair Institute (TBI).

In a February 2026 report, for example, the TBI argues that the government should set an objective of “cheaper power by 2030” instead of “clean power 2030”. It says this could be done “while maintaining a clear decarbonisation trajectory”.

In earlier versions of this argument, the TBI called for a slower expansion of renewables, in favour of greater reliance on nuclear power and carbon-capture and storage.

However, perhaps implicitly acknowledging that these are not cheap technologies, its latest report focuses more on calls for flexibility, optimised grid expansion and a push for electrification.

Perhaps the strongest push to abandon the government’s current approach has come from the opposition Conservative party, which now lobbies hard against clean power 2030, in addition to calling for the UK to scrap all of its climate targets and the legislation that underpins them. 

The party backed a report by thinktank Onward, which claimed that the UK could save “over £320bn” with a push for “cheap power” instead of “clean power”. However, a Carbon Brief factcheck found it relied on a series of questionable assumptions.

Ultimately, the report built its conclusions in from the start by assuming that gas and nuclear power would be cheap. As Tom Glover, head of energy firm RWE UK, put it at the time:

“There’s a difference between a useful scenario and a plan you’d build a system around. This report is the former presented as the latter. If you accept its assumptions, the results follow logically. The problem is the assumptions…built on a stack of optimistic inputs.”

Similarly, Johnny Gowdy, a director at thinktank Regen, argues in a paper responding to the Onward report that its gas-price assumptions are “very optimistic – and potentially reckless”.

Following the start of the Iran war, UK wholesale gas prices – which were already roughly three-times higher than before the Ukraine crisis – have more than doubled again.

According to RenewableUK, the UK is currently experiencing its ninth gas-price “spike” of the past decade. Mulvany tells Carbon Brief that such spikes are “normal”. She adds:

“Wars are fought over energy and resources – and this is the way things have always been…[T]his isn’t a blip. If you look historically, this is normal.”

(The total cost to the UK economy of higher energy prices in the wake of Russia’s invasion of Ukraine amounts to £183bn over four years, according to the ECIU.)

NESO notes that under pathways with a larger role for gas plants, the nation’s energy system would remain “more exposed to volatile international gas prices”.

As such, the UK’s transition is about finding the right balance between the up-front cost of investment in clean-energy alternatives and the ongoing risk of exposure to volatile gas prices.

The IFS also notes that there are additional positives from moving away from fossil fuels, including improved local air quality, less price volatility and potentially greater security of energy supply.

Citing Carbon Brief analysis published in 2024, RenewableUK’s Agnew argues that the government should learn from past “mistakes”.

He points to the then-Conservative government decision from 2015 to “cut the green crap”, which ultimately added £22bn to bills by leaving the UK “more exposed to volatile fossil-fuel prices”.

UKERC’s Carmichael echoes these points, telling Carbon Brief: 

“If we’re not transitioning to clean power, which for the UK would mean more independence and more energy sovereignty, I don’t think there is an alternative…[and] if we don’t do it, then we’re still going to be vulnerable to volatility and fossil-fuel prices.”

Finally, many of the arguments against the clean power 2030 target are based on the idea that it will be extremely difficult to meet and that closing the gap would be costly.

Indeed, recent analysis by consultancy LCP Delta suggests that by 2030, the UK will only reach 83% clean power, with the 95% target unlikely to be hit until 2035.

Yet this reality is implicitly acknowledged by the government, which has said that it will not contract for more clean power towards the 2030 target unless it delivers lower bills.

Speaking at the Energy UK conference in October, Fahnbulleh said:

“We all know that one of the reasons we are seeing rising prices is because we are uniquely exposed to global fossil-fuel markets…There will be people that will say you should slow down…But I believe that we must seize the opportunity of this moment.”

Can electrification of homes and businesses help cut bills?

While there is political disagreement over the best mix of power supplies, there is far greater agreement on the need to expand the use electric technologies such as EVs and heat pumps.

For example, while the Conservative party opposes the government’s clean power plan, it argues that the UK needs to electrify its economy to ensure both “prosperity and a better environment”.

At the Energy UK conference in October, delegates listed “electrification” and “affordability” as the top-two energy related priorities for the government.

There is significant overlap between these two goals.

At present, most households pay separate bills for heating, power and transport. This means they are paying to run three separate energy systems for gas, electricity and petrol.

If the UK largely electrifies its economy, households will instead rely on a single system that heats and powers their homes, as well as fuelling their cars. By boosting consumption, electrification also spreads the fixed costs of upgrading the network across a larger base of demand.

Padelkar tells Carbon Brief that there “isn’t enough electrification in the system” at the moment:

“A significant amount of heating demand is gas-fired…[I]f that demand were to sit on the electricity side instead, it would allow for costs to be shared more fairly across a greater base of consumers.”

According to energy firm SSE, the shift from three “parallel” energy systems to a single one based on electricity would reduce consumer costs over time, as shown in the figure below.

In this context, the usual focus on “dual-fuel” household gas and electricity bills, in isolation, misses the potential for savings due to consolidating not only heat and power, but also car use.

Indeed, electric cars are currently up to nine times cheaper to run than petrol cars in the UK, according to Carbon Brief analysis.

The savings from electrification are partly a result of the far greater efficiency of EVs and heat pumps, relative to combustion cars and gas boilers. Reduced fossil-fuel imports also play a role.

Very similar arguments have been put forward by the UK government’s advisory Climate Change Committee (CCC), the International Energy Agency and others.

A recent CCC report, for example, said that faster electrification “would cut UK household bills”.

It outlined how electrification would not only reduce the cost of the UK energy system in the future, but is already able to cut household costs today, as shown in the figure below. Crucially, its analysis included the higher upfront costs of investing in electric technologies, such as heat pumps.

The government also supports this argument, having set out a £13bn “warm homes plan” that it said could cut household bills by up to £600 per year through investment in energy efficiency measures and clean technologies, such as heat pumps, solar panels and batteries.

Vyas told the Energy UK conference earlier this month: 

“The industry is clear that a system largely supplied by clean power and an electrified economy represents the way forward. This is not driven by ideology but by evidence.”

Article by Molly Lempriere, Dr Simon Evans republished from Carbon Brief under a CC license.