Sean Ridley: Britain’s energy market isn’t working

Sean Ridley is Energy & Environment Researcher at the Centre for Policy Studies

Years of government intervention have rendered Britain’s energy market effectively incapable of operating on a truly competitive basis – entangled by a web of subsidies, taxes and guarantees.

The fault here lies with Labour and Conservative governments alike.

It was a Labour government that passed the Climate Change Act, paving the way for emissions targets and the decarbonisation of our grid. It established the Climate Change Committee, carbon budgets and the Renewables Obligation (RO) and Feed-in-Tariff (FiT) schemes. But it was the Conservatives that introduced a direct price control to the market – the Energy Price Cap, an idea stolen directly by Theresa May from Ed Miliband – and who enshrined Net Zero into law.

These were all seen as necessary in a time of acute climate awareness. Coal has duly been eliminated from our energy mix, while renewables capacity has been greatly expanded: solar, for instance, barely existed in 2011 but now accounts for 21 GW of capacity.

However, the initial government schemes found themselves to be the progenitors of unintended consequences, necessitating further action to compensate for their shortcomings. The Renewables Obligation proved to be financially unsustainable and was closed in 2017, replaced by the more viable Contracts for Difference (CfDs). The FiT scheme was similarly found too expensive and concluded in 2019. But we’re still paying the costs for both of them on our bills.

The Energy Price Cap, brought in to protect vulnerable consumers from being gouged by volatile tariff prices, became the default price of power after the Russian invasion of Ukraine sent wholesale prices soaring, effectively ending price competition in the retail energy market. Today, six firms make up 91 per cent of the market – more than 20 percentage points higher than 2020. Just 18 suppliers operate today; down from 49 pre-energy crisis.

In a new report, the Centre for Policy Studies shows that the price of government intervention is borne by British consumers – and not just in terms of those legacy renewables bills. Britain now has some of the highest energy prices in the developed world, putting the squeeze on households and leaving industry uncompetitive. British households on average pay 20 per cent more for their electricity than their European neighbours do. British industrial firms have it worse – paying 90 per cent more than their competitors on the continent.

Unfortunately, this top-down government direction is set to accelerate: Ed Miliband treats our energy mix like it’s a game of SimCity, and is explicit in his ideological intent to increase the state’s control.

He has set up Great British Energy (GBE) to increase public ownership of the country’s energy assets, appealing to national sovereignty to create a champion capable of matching other state-owned enterprises like France’s EDF and Sweden’s Vattenfall. Yet though GBE had the backing of 62% of the public at the last election, it will likely disappoint their expectations – with an £8 billion capitalisation that is far short of the £40 billion it would have required in this parliament alone to meet its original vision, it seems to spend most of its time handing out uncommercial grants to the public sector to put solar panels on roofs.

GBE will have a supporting role in Ed Miliband’s other grand venture, Clean Power 2030, which aims to rapidly expand renewables capacity further and squeeze out gas – that greatly demonised commodity – by 2030.

But there are problems. Aside from the intermittency issues – the sun isn’t always shining; the wind isn’t always blowing – renewables are not energy-dense forms of generation. For instance, to match the 3.2 GW capacity of the Hinkley Point C nuclear power plant, a solar farm would need to span the entirety of the Isle of Wight.

This doesn’t mean that we should pay much attention to the scare stories about solar farms destroying our agricultural sector: we’ve got plenty of room for both, and in fact you can have solar farms and grazing on the same land. But with all these solar and wind farms dotted across the country, our transmission and distribution networks – the wires and cables that will transport that electricity – will need to be upgraded and expanded. This comes at a cost: the most recent price cap saw network costs rise by £66 per annum.

Then there’s the whole architecture of the CfD scheme – which effectively embeds subsidy as a permanent part of the energy mix. Though not as expensive as the RO was, the scheme effectively acts as a revenue guarantee. So even though gas prices are now falling, and expected to fall further, these new turbines and solar farms will effectively receive a subsidy to meet their strike prices rather than the market price of energy. This is not limited to renewables: Hinkley Point C secured a strike price that is approximately £130 today, far higher than the current £81 wholesale price.

The result is a perverse cycle. CfDs are agreed in order to secure more generating capacity, which lowers wholesale costs, which reduces the return for generators, which increases the subsidies to procure more capacity. And these contracts will have a long-term effect, lasting for 20 years – on top of the legacy costs of the RO and FiT schemes that are still being paid off.

And, as Claire Coutinho has pointed out repeatedly, all of these costs are being stacked on to consumer bills. Of the £963 that made up the average household electricity bill in 2025, £186 was the cost of paying for these schemes, with another £207 going towards network costs. Combined, that is greater than the share of wholesale electricity (£324).

Yes, Labour have opted to move 75 per cent of the cost of the Renewables Obligation on to general taxation, but all this does is pay into one pocket while picking another, with generation subsidies still contributing more than £100 to an average bill.

It is not a comforting picture, but there is some hope. Power Purchase Agreements (PPAs) are private contracts between a corporate buyer and generator and/or supplier for electricity. The UK’s largest solar farm (373 MW) has two-thirds of its power funded by Tesco through a PPA contract. And the second largest? It’s entirely financed through a PPA, without a CfD in sight.

Not only is this energy being procured on a genuinely commercial basis, it addresses one of the obvious and justified criticisms of renewables: that they can only be built with subsidy. If people are happy to build them without subsidy, why not let them?

All of this matters because we need an awful lot more energy – and currently, we are on track to buy it at a very high price indeed. Last year saw an Octopus Energy executive state to a parliamentary committee that even if wholesale costs fell, policy and network costs would still push bills up. This is especially worrying at a time when energy demand is rising for the first time in 20 years. By 2050, it could be 175 per cent higher than it is today.

The EVs, heat pumps and data centres that will drive that demand will not materialise if prices continue as they are. The only answer is for government to get out the way, make mature technologies stand on their own financially and stop socialising the costs of Ed Miliband’s follies via consumers’ bills.

Return power to the markets, and energy abundance can be a reality in the UK.