Why Are Electricity Prices High?

Electricity prices are high in most of the world for a small number of concrete reasons: the price of natural gas, which still sets the wholesale price in a large share of hours; the cost of carbon where it is priced; the cost of building and maintaining the grid; and periods of genuine scarcity when supply is tight. Each acts on a different part of the bill, on a different timescale, and understanding which one is moving explains most of what you read in the news.

Gas usually sets the price

Wholesale electricity markets pay every accepted generator the price bid by the most expensive one needed to meet demand. This is marginal pricing, and it is the single most important thing to understand about electricity costs.

Wind, solar, hydro and nuclear have very low running costs once built. Coal and gas plants have to buy fuel, so their running cost tracks the fuel market. In most systems, in most hours, the last plant needed is a gas plant. Its cost therefore becomes the price for everyone.

That is why electricity prices across Europe followed the gas market so closely through the shock of 2021 to 2023, even in countries generating most of their power from other sources. It is also why prices fall when gas falls. Our gas generation pages show how much each country relies on it, and the day to day gas market itself is covered on our sibling site, World Oil Monitor, which tracks natural gas prices alongside oil.

The share of hours in which gas is the marginal plant is usually much higher than its share of annual generation. A country can generate a tenth of its electricity from gas and still have gas setting the price a third of the time or more, because gas runs in exactly the hours when demand is highest and other sources are short.

Carbon prices add to fossil running costs

Where emissions are priced, as in the European Union’s and Britain’s emissions trading systems, a fossil plant must buy allowances for the carbon dioxide it emits. That cost is added to its fuel cost and so to its bid.

The effect is larger for coal than for gas, because coal emits roughly twice as much carbon dioxide per unit of electricity. A high carbon price can flip the running order between coal and gas plants, which is exactly what it is designed to do. Generation and emissions by country are on our carbon intensity pages.

Carbon costs are usually a smaller component than fuel costs, and they are visible and deliberate, which makes them an easy target in political argument. When gas prices tripled, the carbon price was a minor part of what happened.

The grid is a growing share of the bill

Network charges have been rising in many countries for reasons that have nothing to do with markets. Grids built decades ago are reaching the end of their lives. Connecting new wind and solar, often far from cities, requires new lines. Electrification of heating and transport raises peak demand in places that were not built for it. Reinforcing against storms, heat and wildfire risk costs money.

These costs are recovered through regulated charges over long periods, so they rise slowly and steadily rather than spiking. They also do not fall when wholesale prices fall, which is a large part of why bills stay high after a market shock has passed. The breakdown of a household bill is set out in our note on wholesale prices and retail bills.

Congestion on the existing grid adds a further cost. When cheap generation cannot reach demand, someone has to be paid to generate closer to the load, and consumers pay for the difference.

Scarcity, weather and outages

Some price spikes are not about fuel at all. They happen when there is barely enough capacity to meet demand.

A cold, still, dark week in winter raises demand and cuts wind and solar output at the same time, the condition known as Dunkelflaute. A drought reduces hydro output for a whole season, as has happened repeatedly in Brazil, Norway and southern Africa. A fleet of nuclear reactors taken offline for inspection, as in France in 2022, removes a large block of low cost generation for months. A heatwave raises air conditioning demand while reducing the efficiency of thermal plants and the capacity of transmission lines.

In these hours the price can rise far above any plant’s fuel cost, because the market is rationing scarce supply rather than covering costs. Markets are designed to allow this, on the argument that high scarcity prices signal where new capacity is needed, and many systems pair it with a capacity mechanism and a price cap.

Demand is growing again

After two decades of flat or falling electricity demand in most rich countries, demand is rising: data centres, electric vehicles, heat pumps, and the electrification of industry. Where new supply and new grid are slow to arrive, that growth tightens the balance and raises prices. Country by country demand trends are on our country pages.

What actually brings prices down

Nothing on this list has a quick fix, but the direction of each is clear.

Lower gas prices lower electricity prices almost immediately, and are outside any single country’s control. More low cost generation reduces the number of hours in which gas sets the price, which is a slow, cumulative effect rather than a sudden one. More transmission lets cheap generation reach demand instead of being curtailed. Storage and flexible demand cut the number of genuinely scarce hours. And efficiency reduces the quantity bought, which is the only lever that lowers a bill without lowering a price.

Any honest account also notes the costs: building grid, storage and backup is expensive, and how those costs are shared between consumers, taxpayers and generators is a political decision rather than a technical one. That decision explains much of the difference between two neighbouring countries with similar electricity systems and very different bills.