The flawed UK energy pricing system and the disparity between the decarbonisation agenda and market signals

Electricity vs Gas Market Price Ratio in the UK

When the UK government set its target to achieve net zero by 2050, Greater Manchester went one step further and set an even more ambitious target of 2038, with a key focus placed on decarbonising our power systems.

In 2021, the government announced that it will fully decarbonise the country’s power systems by 2035, ensuring that the country’s homes and businesses are powered by affordable, clean and secure electricity. Currently, gas generation plays a critical role in keeping the UK’s electricity supply secure, but with investment in clean energy technologies this will be used less frequently.

At the Energy Innovation Agency, our mission is clear, we want to accelerate the energy transition by bridging the innovation gap, enabling new, clean, cost-effective, low-carbon energy solutions to be commercialised and deployed rapidly.

By deploying energy solutions not just in the Greater Manchester region but beyond, we aim to speed up the reduction of carbon emissions and in turn help achieve the ambitious targets set by both the government and Greater Manchester.

It's fair to say that the current market unfairly penalises electricity generators compared to gas, based on an out-of-date national baseload power generation model. Electricity already costs more than gas, but taxes and levies on top of this have increased not reduced this price disparity.

Comparison site Compare the Market reported that the average rate for electricity in 2023 is 27.35p per kWh, compared to gas which stands at 6.89p per kWh. When we view this as a price ratio, electricity vs. gas is around 3 or 4:1, which not only negatively impacts millions of consumers but severely hinders the uptake and deployment of low carbon solutions such as heat pumps. In other countries in Europe, such as France, this ratio is closer to 2:1 and deployment rates are far higher.

An outdated model

The national baseload power generation model was designed to meet the electricity demand and ensure a reliable power supply, relying heavily on a few large central power plants throughout the UK, mostly fuelled by non-renewable sources. These plants operate continuously as a stable output, providing the baseload of electricity required to meet minimum demand. This model is often criticised as out of date. Its main flaw is the inflexibility to adapt to fluctuating electricity demands throughout the day, leading to inefficiencies during periods of lower consumption.

The reliance on this antiquated model and on non-renewable fossil fuel-derived sources of energy is having a negative impact on the UK’s ability to reach net zero targets and is hindering development of a burgeoning green economy.

However, in the UK, particularly over the past 30 years, our energy generation landscape has changed with far more power generated from cheaper and more distributed renewable energy sources such as onshore and offshore wind and solar PV, and far less baseload power generated from gas and coal fired power stations.

UK's disproportionate ratio in favour of gas 

According to National Grid ESO, more than a third (38.5%) of Great Britain’s energy was generated by gas in 2022. Still the largest single source of energy in the UK, gas receives substantial financial support in the form of government subsidies to make it more economically viable.

Electricity costs more than gas but taxes and levies on top of this price have made the electricity-to-gas cost ratio significantly disproportionate. In the UK we pay around four times more per unit of electricity against gas per kWh (4:1).

This considerable gap creates a financial disincentive for consumers and businesses to choose electricity over gas, impacting the overall energy consumption patterns in the country and the uptake of low carbon solutions, such as heat pumps. Already, the UK is falling behind in heat pump uptake, with lower rates of installations per household than almost every other country in Europe.

Businesses may find it economically challenging to invest in energy-efficient technologies and renewable energy sources, hindering the transition to a more sustainable energy landscape. The UK government has set a target of installing 600,000 heat pumps per year by 2028 and more balanced energy price ratio would have a positive influence on consumer behaviour, with low carbon solutions becoming more economically viable.

What needs to change

In the current market, switching to cleaner energy is accompanied by disproportionately greater costs. It is clear that to meet the targets, more needs to be done to incentivise the uptake of efficient low carbon technologies for both businesses and consumers.

Countries who have invested heavily in extensive gas grids, such as the UK, have historically been slower to adopt heat pumps, whereas countries with very limited gas grids, such as Sweden, Norway and Finland, have the highest uptake of heat pumps. There is also a clear correlation between the greater costs for electricity and low uptake. The more balanced ratios across Europe provide a valuable lesson for policymakers in the UK. Making electricity cheaper than gas is a crucial element in encouraging the switch to heat pumps and other technologies that utilise electricity.

There is also a clear demand for the deployment of cost-effective low-carbon solutions. In order to meet net zero goals, the transition to low carbon energy needs to be accessible for businesses and consumers alike. As well as reducing the cost, energy systems available need to meet the needs of the end-users. To achieve this, more investment and support for innovators is required.

How the Energy Innovation Agency can help

The Energy Innovation Agency was created in 2021 to accelerate the commercialisation of low carbon innovations and increasing the deployment across Greater Manchester by making clean energy systems more accessible to communities and businesses.

The Agency works with innovators and end-users to connect innovative products and services with businesses, enabling the rapid commercialisation of low carbon technologies and deployment within organisations with energy challenges that are looking to decarbonise.

Access to low-carbon energy innovation does much more than simply support net-zero goals. Energy innovation can reduce energy bills, optimise energy consumption, and even make businesses more competitive.

By speeding up the deployment of low carbon solutions through access to funding and new business models and providing access to cost-effective solutions that meet the needs and challenges of businesses and consumers, alternatives to gas will become more accessible for all.

To find out how the Agency can help you, get in touch.