UK VAT cut fails to lower Europe-leading power prices
A planned VAT reduction will not stop British households paying some of Europe's highest power prices due to a reliance on gas generation and costly grid upgrades.
The UK government will cut value-added tax on domestic electricity from 5% to zero this October, yet British households will still pay more for power than most of their European neighbours. In the second half of last year, the UK had the fourth-highest electricity prices in Europe for medium-use households when taxes and levies were included.
This persistent premium stems largely from how the wholesale electricity market functions. Power prices are set by a bidding process where the last generator needed to meet demand determines the cost paid to all producers. Because natural gas plants usually submit the highest bids due to fuel costs and carbon charges, gas frequently sets the overall price even when it generates just 1% of the total electricity. This mechanism passes the burden of volatile international gas prices, driven higher by conflicts in Iran and Ukraine, directly onto consumers.
The UK's energy mix makes it particularly vulnerable to this system. Natural gas accounted for 31% of UK electricity generation in 2025. By comparison, France generated just 3% of its power from gas, relying instead on nuclear for 69% of its supply. Even the United States, which produces 40% of its electricity from gas, avoids similarly high bills because its domestic shale boom keeps wholesale gas prices low.
However, wholesale gas costs are only part of the burden on British consumers. Network costs and generation subsidies added to household bills have surged as the country races to modernise its grid. Network costs on a typical bill rose from £136 in 2019-20 to £250 in 2026, an increase of £113. Generation subsidies added another £32 over the same period.
"We've probably underinvested in the last decade and now we're trying to catch up so there's quite a lot of spending," says Frankie Mayo, an energy analyst from Ember Energy. Analyst Ben James calculates that network costs will add another £48 to a typical bill by 2030.
The policy dilemma
The government argues its 2030 clean power policy will eventually lower wholesale costs by reducing the frequency with which gas sets the price. Yet this transition requires substantial upfront capital that is currently recouped through consumer bills. The Climate Change Committee has warned that placing these policy costs on electricity bills discourages households from switching from gas to electric heating, and suggests moving them to general taxation instead.
