UK Electricity Prices Locked in Through 2040 Under Current Contracts

Sir Dieter Helm, Professor of Economic Policy at the University of Oxford, said the contracts system for renewables has locked the UK into high electricity costs until at least 2040. He told the Institute for Fiscal Studies podcast that system costs required to integrate renewables have increased total capacity needs from 60 gigawatts to 120 gigawatts.

The Ofgem price cap increased 13 percent earlier this week, raising average household energy bills by £221 per year. Helm attributed the rise partly to the Iran conflict and said the fixed contracts prevent prices from falling even if wholesale gas prices decline.

Helm explained that renewable generators receive fixed payments regardless of market prices, so lower gas prices would widen the gap between contract costs and market rates. He noted that other countries have not adopted similar long-term fixed obligations, leaving UK industry exposed to higher relative costs.

The Department for Energy Security and Net Zero stated that renewables reduced wholesale electricity prices by up to a quarter in 2024 and that gas set the marginal price only 60 percent of the time, down from 90 percent earlier in the decade.

Helm said several energy-intensive sectors, including refining and fertilisers, have already closed facilities, and data centres have chosen other locations. He called for an objective review of whether further renewable expansion at current contract prices remains viable before additional capacity is added.

A Department for Energy Security and Net Zero spokesman said the last renewables auction secured prices more than 50 percent below the cost of new gas plants and that the share of time gas sets electricity prices is projected to fall to 50 percent by 2030.