Flawed system leaves millions paying too much for energy bills, says GABRIEL MCKEOWN

Gabriel McKeown is head of macroeconomics at Sad Rabbit.

Inflationary pressures have eased considerably from the peaks reached in late 2022.

Yet households across the country continue to grapple with the lingering effects of a prolonged cost-of-living crisis.

Prices for essential goods and services remain significantly higher than historical norms.

Despite reassurances of an economic recovery on the horizon, many consumers are yet to experience meaningful relief.

One of the most notable contributors to these persistent high costs has been the energy sector.

Costly: Energy bills remain stubbornly high for consumers across Britain

Even with a sizeable drop in wholesale natural gas prices, bills are remaining stubbornly high for consumers.

Even with a cut to the price cap on the horizon, this represents a delayed response to wholesale prices that fell many months ago.

Consumers have been stuck paying elevated rates, and are long overdue a reduction in the cap.

This situation has intensified calls for policy intervention and market reform.

The energy market has had a tumultuous few years. Wholesale gas prices plummeted in the spring of 2020, as Covid-19 lockdowns strangled economic activity.

They then surged by late 2021 due to supply bottlenecks following the global re-opening.

This was further compounded by the Russia-Ukraine conflict, which saw UK and European wholesale gas prices spike to record levels. They briefly rose by ten times from the pandemic lows.

Households were largely sheltered from this immediate energy cost jump, thanks to the retail price cap administered by Ofgem, combined with massive government subsidies when that proved insufficient.

The price cap had already risen 54 per cent in April 2022 but was set to soar a further 80 per cent in October 2022. This resulted in emergency intervention in the form of the Energy Price Guarantee (EPG).

Turbulence: The energy market has had a tumultuous few years

Yet the market is far from static. Despite British families seeing energy costs leap to record highs in 2022, by early 2023, a combination of mild weather, ample gas storage in Europe and reductions in demand brought wholesale prices down sharply.

Unfortunately for consumers, the regulated price cap was slow to follow. It wasn’t until mid-2023 that the cap fell below the government’s EPG level, providing some relief.

By Autumn 2023, the cap stood at around £1,568 for a typical household. This still far exceeded the pre-Covid average of below £1,000.

Furthermore, as of early 2025, the average bill under the cap remains 52 per cent higher than in the winter of 2021 and 2022. This illustrates how far energy costs have diverged from the baseline.

With Europe enjoying relatively mild weather and benefiting from increased non-Russian supplies, wholesale gas prices were on a clear downward trend at the beginning of this year.

Yet households were told to expect higher bills once again.

Gas prices had dropped to levels not seen since mid-2021. But to justify this latest rise, Ofgem pointed to a brief wholesale price spike that occurred during the cap’s assessment window in February.

However, by the time the cap increase was announced, those market prices had already fallen back to previous levels.

Yet this earlier spike had now been baked into consumer rates for months to come.

Consequently, Ofgem declared that the energy price cap would rise by 6.4 per cent from April.

This has resulted in households paying an additional £111 annually, and marked the third consecutive quarterly increase in the cap.

This highlights a crucial flaw in the UK pricing system. The price cap is not a real-time reflection of market prices but is instead based on future wholesale prices averaged over the prior period.

The aim is for this to smooth volatility in prices. But in this case, suppliers had bought much of the energy for spring 2025 during late 2024 and early 2025 when prices were higher.

In effect, household prices right now reflect the wholesale market of several months ago. This leads to a gap between the latest energy prices and the bills facing consumers.

The energy regulator confirmed that energy bills will fall by £129 in July.

The energy supplier sector has undergone a significant transformation during this period.

It has shifted from a group of loss-making firms on the brink of collapse in 2021 to an arguably healthier state overall, thanks to consolidation and improved profitability.

The UK has ended up with an energy system where the risk of high wholesale prices was largely shifted to taxpayers.

This was achieved through significant government subsidies and ongoing elevated bills.

However, the rewards of higher prices were reaped primarily by the producers and some well-hedged suppliers.

This comes at a time when many households are still grappling with energy costs significantly elevated from pre-crisis levels, resulting in widespread energy debt.

More than three million households have now fallen behind on payments, exacerbating the living standard collapse experienced over the past few years.

Combatting these issues was a core policy point during much of the election campaigning last year.

Yet Labour, which came to power partly on promises to address the energy crisis, faces growing criticism as high bills persist.

The government has started to implement policies aimed at reforming the energy sector, such as establishing GB Energy, a publicly owned entity designed to increase the UK's clean energy capacity.

But these measures offer limited immediate relief to households.

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To truly address the foundational issues facing the sector, it will require far broader policies.

There needs to be a reassessment of how consumers fit into the energy sector’s business model.

Energy suppliers naturally defend their hedging practices as essential for market stability.

Purchasing energy through forward contracts is necessary to manage risk in rapidly fluctuating markets.

They can claim that this protects both themselves and consumers from unpredictable price swings.

However, the past few years have shown that while suppliers are insulated from short-term market volatility, consumers feel the direct and prolonged impact of past wholesale price spikes.

Even when consumers seek relief from escalating prices via fixed-rate energy deals, which are increasingly available at prices below the current capped rates, these options do not address the structural problems embedded within the UK's energy pricing model.

As long as wholesale and retail prices remain disconnected, structural inequities will persist.

Addressing these systemic flaws will require immediate reform of pricing mechanisms. It will also need sustained long-term investments in British energy independence.

A particularly important area of potential reform is a reevaluation of geographical differences in standing charges.

These have drawn criticism for exacerbating regional household inequality.

There is also mounting support for introducing targeted social tariffs. These would provide direct financial relief to vulnerable groups that are most impacted by energy market volatility.

Aligning Britain more closely with several European peers. Along with offering a viable short-term solution, while longer-term structural adjustments are implemented.

Without such actions, British consumers will continue facing elevated bills despite falling wholesale energy prices. This will leave them to bear the brunt of system-wide inefficiencies that have yet to be meaningfully addressed.