Britain’s Energy Outrage: Flawed System Leaves Millions Paying Too Much as Wholesale Prices Fall

Despite a significant drop in wholesale natural gas prices, UK households face yet another hike in energy bills, revealing deep-seated flaws in the country's energy pricing system.

Despite inflationary pressures easing considerably from the peaks reached in late 2022, 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, and 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, as despite a sizeable drop in wholesale natural gas prices, bills are once again rising for consumers, intensifying calls for policy intervention and market reform.

The Paradox of Energy Pricing

The energy market has had a tumultuous few years, with wholesale gas prices plummeting in the spring of 2020, as COVID-19 lockdowns strangled economic activity, before then surging 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, briefly rising by ten times from the pandemic lows. However, households were largely sheltered from this immediate energy cost jump due to the retail price cap administered by Ofgem, which was later combined with massive government subsidies when that proved insufficient. In fact, the price cap had already risen 54% in April 2022, but was set to soar a further 80% in October 2022, before emergency intervention in the form of the Energy Price Guarantee.

Yet the market is far from static, and 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, and it wasn’t until mid-2023 that the cap fell below the government’s EPG level, allowing some nominal relief. By Autumn 2023, the cap stood at around £1,568 for a typical household, which still far exceeded the pre-COVID average of below £1,000. Furthermore, as of early 2025, the average bill under the cap remains 52% higher than in the winter of 2021 and 2022, illustrating how far energy costs have diverged from the baseline.

The Supplier-Consumer Divide

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, yet in order to justify this latest rise, Ofgem pointed to a brief wholesale price spike that occurred during the cap’s assessment window in February. Although by the time the cap increase was announced, those market prices had already fallen back to previous levels, and the 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% from April, resulting in households paying an additional £111 annually, and marking the third consecutive quarterly increase in the cap. This highlights a crucial flaw in the UK pricing system, as the price cap is not a real-time reflection of spot market prices, but is instead based on forward wholesale prices averaged over the prior period. The aim is for this to smooth volatility in prices, so 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, leading to a differential between the latest energy prices and the bills facing consumers.

The energy supplier sector has undergone a significant transformation during this period, going from a group of loss-making firms on the brink of collapse in 2021 to an arguably healthier state via consolidation and improved profitability. Consequently, the UK has ended up with an energy system where the risk of high wholesale prices was largely shifted to taxpayers via significant government subsidies, and consumers via delayed pass-through and now ongoing high bills, whereas the rewards of higher prices were reaped primarily by the producers and some well-hedged suppliers. There are logical explanations for this outcome, however that doesn’t detract from the concerning consumer perspective, where many households are still grappling with energy costs significantly elevated from pre-crisis levels. This unprecedented strain on household finances has resulted in widespread energy debt, with more than three million households falling behind on payments, further exacerbating the living standard collapse experienced over the last few years.

The Promise of Market Reform

Combatting these issues facing households nationally 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. Admittedly, the government has begun to implement policies aimed at reforming the energy sector, such as the establishment of GB Energy, a publicly-owned entity designed to increase the UK's clean energy capacity. But these measures offer limited immediate relief to households, and in order to truly address the foundational issues facing the sector, it will require a far broader policy review and 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, as purchasing energy through forward contracts is necessary to manage risk in rapidly fluctuating markets, protecting 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. Furthermore, despite consumers seeking 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 inherent within the UK's energy pricing model.

As long as wholesale and retail prices remain disconnected, structural inequities will persist, and addressing these systemic flaws will require a combination of immediate reform of pricing mechanisms and sustained long-term investments in British energy independence. From a purely policy perspective, a particularly resonant area of potential reform is the re-evaluation of geographical differences in standing charges, which have drawn criticism for exacerbating the country’s regional household inequality. Furthermore, there is mounting support for introducing targeted social tariffs, which would provide direct financial relief to vulnerable groups that are most impacted by energy market volatility. These policies would align Britain more closely with several European peers, offering a viable short-term solution while longer-term structural adjustments are implemented. Without such actions, British consumers will continue facing elevated bills amidst falling wholesale energy prices, bearing the brunt of systemic inefficiencies that have yet to be meaningfully addressed.