22nd September 2026
Why Are British Electricity Prices So High? The IFS Looks Behind the Bill
Britain has spent years trying to make its electricity system cleaner, but households and businesses are now paying some of the highest electricity prices in the developed world.
A new report from the Institute for Fiscal Studies (IFS) examines why electricity has become so expensive and asks whether the way Britain prices and taxes electricity needs to change.
The scale of the increase is striking.
Since 2010, household electricity prices have risen by around 147%, compared with a 63% increase in general consumer prices. For businesses, electricity prices have risen by about 174%, compared with a 76% rise in producer prices.
Britain was not always an outlier. For much of the past two decades UK electricity prices were somewhere around the middle of comparable advanced economies. But the sharp increases since 2020 have left Britain with some of the highest electricity prices in the G7 and across Europe.
Gas is still a big part of the story
One reason is familiar.
Although Britain now produces more than half of its electricity from renewable sources, gas-fired power stations still play an important role in setting electricity prices.
International gas prices rose sharply from 2021, particularly following Russia's invasion of Ukraine. The IFS says gas prices were still 63% higher in real terms in the first quarter of 2026 than in the second quarter of 2021.
That matters because the British electricity market is particularly exposed to gas prices.
The IFS points out that higher wholesale gas prices were the main reason for the large increase in household electricity prices between June 2021 and December 2023.
But the report says this is only part of the explanation.
The cost of moving towards cleaner electricity
Over the past 15 years Britain has transformed its electricity system.
In 2010, only around 7% of electricity came from renewable sources and nearly 30% came from coal.
By 2025, renewables supplied more than half of Britain's electricity and coal generation had effectively disappeared.
That transformation required substantial investment and government support. The costs of supporting renewable generation, carbon reduction and home energy efficiency were, in part, recovered through electricity bills.
The IFS estimates that taxes and levies on electricity, excluding VAT, increased by 59% in real terms between 2017 and 2025.
In 2025 they accounted for around 23% of an average household electricity bill.
The Government has since taken steps to reduce some of these charges, so the IFS estimates they represented about 17% of the average household bill in July to October 2026.
This is an important qualification to the argument.
The IFS is not saying that renewable energy itself is inevitably responsible for permanently high electricity prices. In fact, the cost of renewable generation has fallen dramatically.
The problem is that Britain is currently paying for a system undergoing a major transformation.
The grid is becoming another big bill
There is another cost coming down the line.
Britain needs to expand and upgrade its electricity grid to accommodate more renewable generation and increasing demand from electric vehicles, heat pumps and other forms of electrification.
The IFS estimates that spending on grid upgrades is expected to more than double in real terms by the end of the decade.
The costs of balancing the electricity system are also expected to more than double.
Together, grid upgrading and balancing costs were around £7 billion in 2024–25 and are expected to rise by about £12 billion a year by 2030–31.
The IFS says these costs could subsequently ease if the necessary grid investment is delivered on time.
That last point is important. Britain is effectively investing heavily now in an electricity system that is expected to operate differently in the future.
Electricity is not priced according to when it is cheapest
One of the more interesting arguments in the report concerns when people use electricity.
Wholesale electricity prices can vary substantially from one hour to another.
Yet only around 10% of households currently face electricity prices that vary according to the time of day.
That means most households have relatively little financial incentive to shift their electricity consumption away from expensive periods.
There can also be periods when Britain has more renewable electricity than the system can use, particularly when there is strong wind generation and relatively low demand.
The IFS argues that better use of time-varying electricity prices could encourage households and businesses to use more electricity when it is cheaper to produce and less when the system is under pressure.
For somebody with a smart meter, electric heating, an EV or other flexible electricity use, that could eventually become more significant.
Should some costs come off the electricity bill?
Another major recommendation concerns how the system is funded.
Some costs currently recovered through electricity consumption do not actually depend on how much electricity an individual household uses.
For example, maintaining the electricity network and supporting certain low-carbon capacity involves costs that exist whether a household uses a little electricity or a lot.
The IFS argues that putting all these costs into the price of each unit of electricity discourages electricity use.
It suggests that some of these fixed costs could instead be recovered through standing charges or general taxation.
There is a difficult political choice here.
Moving costs away from the electricity unit price could make electricity cheaper to use, but the costs themselves would not disappear. They would simply be paid in another way.
The net-zero dilemma
Perhaps the most interesting part of the report is that the IFS does not offer a simple answer to the argument over net zero.
It says that pushing rapidly towards decarbonisation can increase costs in the short term.
But the dramatic fall in the cost of renewable energy means the long-term effect is much less certain.
Government forecasts suggest that reaching net zero by 2050 could modestly increase the overall cost of the energy system compared with pursuing less ambitious emissions reductions. However, the IFS stresses that such forecasts are highly uncertain.
Fuel prices, technology, interest rates, storage and the cost of building the electricity network could all change the calculation.
There is therefore no simple conclusion that Britain should either abandon its renewable energy programme or simply continue with the present system unchanged.
What does it mean for households and businesses?
The IFS report is ultimately asking a fairly fundamental question.
What should we actually be paying for when we pay our electricity bill?
At present the bill reflects wholesale energy costs, network investment, renewable support, other policy costs, taxation and the cost of supplying electricity.
Some of those costs are directly related to the electricity being used. Others are really costs of maintaining and transforming the wider energy system.
The IFS argues that the distinction matters because electricity is likely to become increasingly important as Britain tries to replace fossil fuels in heating and transport.
There is an awkward contradiction if the country wants people to use more electricity through heat pumps, electric cars and other technologies while simultaneously loading a significant part of the cost of the energy transition onto each unit of electricity consumed.
For households in places such as Caithness, there is another part of the story.
The Highlands are becoming increasingly important to Britain's renewable energy system, but producing large amounts of renewable electricity does not automatically mean local households receive cheap electricity.
The electricity still has to be transmitted, the network has to be expanded and the wider system has to be paid for.
The IFS report does not provide a quick fix to that problem.
What it does is expose a question that is likely to become increasingly important: if Britain wants to electrify more of its economy, can it continue with an electricity pricing system that makes electricity so expensive to use?
That may turn out to be one of the most important energy-policy questions of the next decade.
Institute for Fiscal Studies Electricity Prices 22 September 2026