UK energy prices rose steeply from early 2022, contributing significantly to the rising cost of living and resulting in various government support packages. Prices have since fallen, but they remain relatively high and energy will likely remain a high-priority issue for the 2024 Parliament.

Energy policy priorities

The UK’s energy system supplies its electricity, transport, heating and industrial needs. Energy policies focus on delivering three main objectives for the system: affordability, security of supply and sustainability.

Recent global events have increased concerns about affordability and security, although the price of new sustainable, low-carbon technologies (such as wind and solar) has generally fallen. The Climate Change Act 2008 sets a requirement to reduce greenhouse gas emissions, most of which originate from the energy sector, to net zero by 2050.

Current state of the energy system

The UK’s energy supply is dominated by fossil fuels, which meet approximately 78% of its demand, according to government data. This is mainly split between natural gas for heating and electricity, and petrol and diesel for transport.

The proportion of low-carbon sources of energy is increasing, particularly for electricity (where low-carbon sources accounted for 56% in 2022), but electricity only met around 18% of total energy demand in the UK in 2022. The role of electricity is expected to increase with the increasing adoption of technologies such as heat pumps for heating and electric vehicles in transport.

The UK is a net importer of natural gas, with the majority coming from Norway, the US and Qatar. The UK is also a net importer of petroleum with the US and Norway the largest sources. The UK became a net exporter of electricity in 2022 for the first time in 40 years.

The Library briefing Introduction to the domestic energy market provides an overview of the energy system. The government also publishes an annual report on UK energy system statistics.

Affordability of energy

The cost of energy increased significantly from the beginning of 2022, mainly because of increased demand after pandemic restrictions were lifted and reduced supply following Russia’s full-scale invasion of Ukraine. The price of natural gas on international markets spiked, which increased the retail market prices of gas and electricity.

By the end of 2023, the cost of the average annual household energy bill, as set by the regulator Ofgem in its energy cap, had more than doubled to over £4,000. In response, the government introduced measures that provided financial support to all UK domestic consumers.

The price of natural gas has since fallen and most government support mechanisms were discontinued in spring 2024. But consumers still face high prices, which include additional payments for the costs of failed suppliers and increased consumer debt.

In the UK, the price of gas and electricity are set by the most expensive energy source. This is usually gas. The Library’s Insight Why is cheap renewable electricity so expensive on the wholesale market? explains more.

Outcomes of the energy crisis

The energy price crisis drove policy interest on affordability issues for customers, including fuel poverty and energy efficiency. It also raised issues around the security of supply, such as reducing the UK’s reliance on imported natural gas, the future of North Sea oil and gas and supporting domestic electricity generation.

The Library briefings Gas and electricity prices during the ‘energy crisis’ and beyond and Help with energy bills provide more information on these issues.

The 2019 Parliament enacted the Energy Act 2023. This introduced a range of new provisions for the energy system, including:

  • a new, independent, public National Energy System Operator (NESO) to be launched in summer 2024 with responsibility for planning and operating electricity and gas networks
  • new provisions for emerging energy infrastructure such as carbon capture, usage and storage, and hydrogen production
  • consumer protections relating to smart appliances, heat networks and energy efficiency

Issues for the 2024 Parliament

Several issues for energy policy are ongoing and are likely to be considered in the new Parliament:

  • A Review of Electricity Market Arrangements (REMA) to redesign the wholesale electricity market is underway to ensure delivery of low-carbon electricity generation at the scale and pace required. Various options are being considered, including the future of the Contracts for Difference scheme, which is the main support mechanism for large-scale low-carbon power.
  • Speeding up grid connections for new energy infrastructure is a focus for National Grid, which owns and manages the electricity transmission grid, and for Ofgem. In 2023, the government commissioned a review and accepted the recommendations, which are now being actioned. But further attention will be needed by the 2024 Parliament.
  • The roll-out of low-carbon heating options such as heat pumps, remains slow and the new government will need to make decisions on the future of the gas grid and hydrogen.
  • The UK faces competition globally to attract investment into new energy infrastructure, especially with the Inflation Reduction Act in the US and the European Green Deal. The government established a UK Infrastructure Bank in 2021, but recent global policy developments mean more government intervention on mobilising green finance is expected.

Author: Alan Walker

Photo Credit: Nicholas Doherty on Unsplash

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