UK industry has struggled for years under the burden of relatively high electricity costs
The stream of bad news about energy shows no sign of ending.
Last month the regulator Ofgem confirmed that the cap on domestic bills will rise by another 4% in October, despite the temporary removal of VAT from the cost of electricity.
Last week the wholesale price of natural gas in the UK rose to another three-year high. This pretty much guarantees that energy bills will rise further in January, perhaps by as much as 10%. The cost of crude oil is climbing again too, and prices at the pumps will surely follow.
These latest increases are at least being driven primarily by market forces rather than by poor government policies. Stocks of natural gas are low across Europe and supplies of both gas and oil are still being disrupted by what some are now calling the “forever war” in the Middle East. The painful economic reality is that higher prices remain the least-bad way to balance supply and demand.
Energy costs, particularly gas, are at least still well below their peaks in the autumn of 2022, when UK consumer price inflation exceeded 11%.
And while this is little consolation either, Britain is not alone. Rising energy prices are also driving up inflation in the euro area and in the United States. The European Central Bank has already responded by raising interest rates once and is widely expected to do so again this month. The US Fed now looks increasingly likely to hike soon too.
The cost of government borrowing is now surging almost everywhere, due to global worries about inflation, interest rates, and bond issuance.
But yields are far higher in the UK than in other countries, in part because of specific investor concerns about the Labour government’s fiscal plans.
Much of the pain in the energy markets is self-inflicted too. British industry has struggled for years under the burden of relatively high energy prices.
This explains the poor performance of the UK economy far better than Brexit. It is surely no coincidence that the other European laggard over this period has been Germany, where energy policy is also a mess.
Rather than address the underlying reasons why energy is so expensive, the government has gone for short-term fixes – such as the recent cut in VAT. Another round of support for more vulnerable households looks inevitable.
But remember that someone still has to pick up the bill. This is most likely to be other customers or taxpayers, and probably both.
Moreover, most of the remaining fixes would not prevent higher energy prices from feeding through into higher inflation. This is because the official statisticians usually treat discounts on bills as a “transfer payment”, which raises income rather than reduces either expenditure or prices.
The upshot is that any further policy intervention is unlikely to ease the Bank of England’s worries about “second round” effects from higher energy commodity prices.
There are some glimmers of hope. Andy Burnham has been quick to acknowledge that Britain will continue to need some oil and especially gas for many years, and that it makes sense to source more of that from the North Sea ourselves.
The decision to shunt Ed Miliband off to the Foreign Office was encouraging too, although this may come at the price of a big increase in the overseas aid budget.
But the legacy of the dumbest “net zero” thinking runs deep. The new Energy Secretary, Miatta Fahnbulleh, has yet to make a decision on the future of the Jackdaw and Rosebank fields in the North Sea.
The arguments used by opponents are feeble and contradictory. We are continually lectured that energy is bought and sold on global markets, so a small increase in UK supply will have not any impact on domestic prices.
Yet that same small increase in UK supply is supposedly enough to make a major contribution to global climate change. As bemused American observers often say, “go figure”.
In fact, it is not even true that there is a single global price for energy. But even there were, sourcing more of it from the North Sea would be better for the UK’s balance of payments and public finances, as well as having a smaller carbon footprint than imports from further afield.
Similarly, we are often told that North Sea production of oil and gas is almost exhausted. But if that were true, there would be no downside from selling more licences to drill, if anyone still wanted to buy them.
A less ideological and more pragmatic approach would be to ensure that the prices of different energy sources reflected all the costs involved, including any environmental and social costs, and then let the markets decide how best to meet the UK’s energy needs.
Instead, successive governments have layered subsidy upon subsidy for renewables, while hitting fossil fuel companies with additional taxes that bear no relation to any sort of economic reality. No wonder so many of them are giving up on the UK.
At the same time, the government continues to make it hard for any UK business, including energy companies, to access the property rights, land, labour, and other resources needed to respond to demand.
The energy specialist David Turver examines these underlying problems in greater detail in a chapter of a new book, “The Great Stagnation”, which was published last week by the Institute of Economic Affairs (IEA).
(For the record, I am a Fellow at the IEA and contributed the chapter on the impact of “austerity” and Brexit.)
In short, poor energy policy is one of the big reasons why the British economy has stopped growing. The UK has imposed a swathe of legislation that has increased the regulatory burden and made energy scarce and expensive.
In particular, the focus on intermittent renewables and punitive taxes on hydrocarbons has given the UK the dearest industrial electricity prices in the developed world.
Until the government recognises this, the bad news will keep on coming.
This piece was first published in the Daily Telegraph on 7 September 2026
You can follow me on X (formerly Twitter) @julianhjessop and on Bluesky @julianhjessop.bsky.social.
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