Chapter 1: What is the main topic discussed in this episode?
Just quickly before we get into the episode, at the minute we're really trying to understand how people in the UK are saving for their futures. We hope that we can turn it into something really useful, maybe a rapport or a video on my channel. We'd love your input, it would take about five minutes, it's completely anonymous and if you're up for it you can find a link in the description.
The UK has some of the most expensive household electricity in the world. When the gas price is high, that gives us an expensive system.
Between pre-crisis, so say 2019, and now, basically the price cap's gone up almost 50%.
Any way we slice it, we're at the top end of the bell curve distribution, right? At the moment, we are. The price you pay for energy is shaped by rules set by Ofgem, the UK's energy regulator. Neil Kenwood is one of their directors. If there's 10 units of energy and nine of them cost £1, but the gas costs 10, we pay 10 for every unit.
We can't guarantee people get low bills. What we can do is guarantee fair bills.
Are you saying by 2050 that people's energy bills won't have declined? They'll still be this price? I would just like to start, if we can, by you explaining what Ofgem do.
Yeah, of course. So, Ofgem is Britain's independent energy regulator, and we basically exist to help protect energy consumers, and that gives us a number of important roles. We regulate the retail market on the one side, and we also regulate the networks that provide the gas and electricity into people's homes and businesses.
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Chapter 2: Why is UK electricity so expensive compared to other countries?
And there's quite a lot within that. And on the retail side, we set the price cap. A lot of people will have heard of the price cap, and we can talk more about that. But we also make sure that the suppliers adhere to a set of rules and principles in order to deliver good service to customers and treat customers fairly.
And then on the network side, we run a regime that approves the investment they need to make and tries to deliver that at least cost. So the regulatory regime we run enables them to invest billions of pounds, but at relatively low cost of capital. So it keeps the cost down for consumers.
There are other bits of infrastructure that we're also now taking responsibility for regulating in a similar way. So, for example, around hydrogen, running a sort of similar cost regulation regime for nuclear going forward, the size well plant, things like that. And then above all of that, we try to just make sure that the system works efficiently.
And in that area, for example, we're promoting the development of more flexibility in the electricity sector. Because if people can use more energy when it's cheaper, for example, when the wind is blowing, sun is shining, then the cost of the whole system can come down. So that's the overall goal and the main mission for Ofgem.
How does Ofgem think it's done in the last few years? I think...
The main challenge for us over the last few years, I think it's fair to say, was the energy crisis last time. So when the Ukraine invasion happened, the price of gas went dramatically higher for the whole of Europe, including Britain. And that caused a lot of problems in the energy sector, obviously huge problems for households and businesses who were having to pay higher bills.
But it also revealed some instability and vulnerabilities in the retail market. So a lot of the Retailers, we call them energy suppliers, went bust during that time. So there were a lot of lessons for Ofgem in how to handle that.
And we have invested really strongly now in a new regulatory process by which suppliers have to demonstrate their resilience so they can take financial shocks and not necessarily go out of business. That doesn't mean an energy supplier won't fail or won't go out of business.
If they do a bad service or they want to exit the market, then we still need that fluidity, the ability to enter and exit the market. But what we have improved is the stability of the sector.
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Chapter 3: How does Ofgem regulate energy prices in the UK?
Obviously, it happened. And I know people at the time were like, oh, he's parking tanks on the border, but he's not going to cross the border. And then it was like, oh, he did. But it doesn't feel like that big of a surprise as an event.
So I guess... One of the things that organisations all need to think about is what are the risks that can hit a market? And I think we hadn't. I don't think anyone had really anticipated that risk. In retrospect, it looks like, oh, well, it could easily have happened. But I don't think people were expecting that.
And the scale of increase in the prices that happened as a result of that invasion, it was like rolling the oil crises of the early 70s and late 70s, both oil crises together into a single shock and all focused on the gas market. And so that was... That was a really unprecedented hit that hadn't occurred in gas markets as long as they had existed, to be honest.
Because mortgage markets stress test post 2008, don't they? They will say, oh, what happens if your rate goes up by a large amount on top of the current amount? I would think from an energy regulator perspective, you would go, what happens if... supply, we lose 20% of supply, you know, because the Strait of Hormuz gets blocked up or because Putin invades Ukraine.
Was that not like a question that they were asking prior to those events?
It wasn't really integrated into our regulatory regime at that point. But we now have exactly those sort of stress tests we've learned from the financial sector. It is a different sector. And you don't have that sort of regulation across every part of the economy. But I think the energy sector is important enough to justify that sort of extra regulatory burden.
And we've now seen why that is necessary.
It's very vulnerable to shocks. You know, things can happen on the other side of the world that impact people here. So you need those stress tests. But just to clarify, why did they all go bust? Because they're making lots of money, and then obviously the prices go up, but why can't they just survive for a little bit? What was it about the war that made them all go bust?
Yeah, so it's a sort of interesting interaction between the rising prices at the time in the market and the price cap. So the price cap was six monthly at the time. And so the companies would sell these, mainly these sort of one or two year fixed products. Now, they would buy, ideally they would buy that energy in advance for that customer.
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Chapter 4: What impact did the energy crisis have on the UK energy market?
So take electricity, say from a wind farm in the North Sea all the way to your house and the same on the gas side. So it's quite a lot of investment goes into that and that's 28 pounds in every hundred. So that's another big chunk. Then the company itself,
the energy supply company that delivers all that, the sort of centricas, octopuses, Scottish powers of this world, they also have costs to cover sort of call centres, the metering services they provide, smart metering. They also have to cover people who get into debt and can't pay their bills. So they've got costs, which is about £17 in that hundred.
So that's about one sixth of your energy bill covers their costs. Then there are some policy costs that the government have as part of the energy bill. They split into two basic categories. One of them is subsidies for clean power. Slightly complicated because some of the clean power contracts are now we consider as part of that energy package I mentioned at the beginning, that £40.
But some of the older subsidies, so the renewable obligation, which was the original big subsidy program for wind and solar power in this country, plus something called the FITs, feed-in tariffs. So you might remember about 15 years ago, there was a big... A subsidy program, people putting solar panels on the roof and getting subsidies for them, that sort of had a legacy cost.
And there's the nuclear program. So Sizewell, which has started construction on Sizewell, a big new nuclear power station, that's also starting to have a cost on bills as well. So that is the sort of one part of the policy costs. Then the other part is subsidies. So there's something called the Warm Homes Discount.
And for a number of, in fact, millions of households who are poor, they're on means-to-benefits or pension credit, they get a subsidy on their injury bill of, I think, about £150 a year. But that's paid for by everybody else. So that also adds a little bit to the bill. So basically, in combination, those two sets of things are another £6 out of the £100.
There used to be a bit more, but the Chancellor decided in 2025 that from April 26, a big chunk of those old renewable costs, renewable subsidies, should be taken off of bill payers and put into exchequer funding. So essentially taxpayers pay for 75% of that.
They've moved it to somewhere else, basically.
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Chapter 5: Why have so many energy suppliers gone bust recently?
The money still has to be paid, right? These are contracts that still need to be paid. But it's no longer coming from people's energy bills. It comes from the tax revenues that government take instead.
Okay. So I want to dive into little bits of that because there's obviously a lot we could talk about. But one thing that you mentioned there was the renewable stuff. And what struck me was you're saying basically we're paying for the initiatives that we did in the past. So like solar panels and things. Yeah. Energy prices today are some of the highest they've probably ever been. Yeah.
So are we not seeing a payoff for those previous renewable... Yes.
And we can get into this in more depth. So once you build a solar panel or a wind farm, it's actually pretty cheap to run it. But the capital cost of setting it up still needs to be recovered by the company that built it. That has required, in the early days, when the technologies were new, they were quite expensive. So some of those old, that's renewable obligation costs.
Some of them are quite high costs. But as I say, the exchequer, the chancellor, has taken a big chunk of that off of people's energy bills. Then the prices got much cheaper as the technologies matured. They've gone up a bit again recently, but... Basically, you're right that the more of this we build, the less gas we need to use.
And therefore, what we call the wholesale price, which is the market price of electricity on any given day, that will be lower if there's more wind and solar power generating. Particularly if it's enough for the whole country, then the price goes much lower because we don't need gas on the system. And it's gas that otherwise sets that marginal price, that wholesale price.
So it's quite a complicated market, but actually your basic point is correct. that if you put more renewables on the system, the wholesale price goes down, but you're paying for those renewables with the longer term contracts and subsidies. So it's paid for in a different way. But over time, it does offer the opportunity to bring down the cost of energy bills.
So for example, compared to the Ukraine gas crisis, when the gas price went up, the electricity price went up almost one for one in the same sort of proportion. This time with the Iran crisis, the gas prices shot up not as much, but it shot up. The electricity price hasn't gone up as much.
And that's because the renewables in the system provide a bit of price stability, because they've got those long term contracts.
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Chapter 6: How does the price cap work and what does it cover?
But that doesn't deliver... So the market is dynamic. So what we need changes over time. It changes literally... People buy and sell electricity on a half-hour basis. But can it just fluctuate? And we need that... The market is an efficient way of delivering energy at least cost.
We've got a structural issue right now, as you've been describing, where gas is setting the price for lower cost renewables benefiting. But as I say, that issue does go away over time. So there are, you know, various people suggested various solutions that could cut through that. But as I say, the government looked at those. It concluded that the benefits...
would take a long, you know, those changes would take a long time to make. And by the time you've made those changes, actually most of the issue has gone away and the impact of that gas price setting has diminished a lot.
One criticism of moving to an average price that I saw was the belief that the cheaper would basically move to the higher price. At the minute, basically, you go out to the market and you go, who's got the cheapest energy? And they all rush in and go, we have, we have, we have. And then they know that the last unit will dictate how much they get paid for that unit.
So if you say average price, those cheaper guys are more inclined to go, well, I'll just set my price like it's gas at the start. So that's the efficient point of the market. But as the regulator, could you not regulate against that?
So you're exactly right that the current system is considered efficient, as in it gives every participant in the market all those generators the incentive to tell the truth about exactly what their cost of generation is. Because they want to be in the line of... They bid in that at their cost, and the incentive on them is, as I say, to tell the truth.
Whereas if you do some sort of average price scenario, they have an incentive to try and game it, and that is less efficient. It could push up the overall price. We wouldn't necessarily know what their actual costs are. So as a regulator, it would be really hard. You'd end up in a sort of gaming situation with the sector. I don't know of any markets that use that approach.
The average price. This kind of... The most expensive sets the price. Is this common across our peers internationally?
It's considered best practice because both in the short run and the long run, it sort of delivers the right incentives to all the players in the market and therefore hopefully gives the lowest price to consumers. Now, we've talked about the structural issue where it looks like that sometimes doesn't happen now, but I think it is... It is the best practice sort of market design.
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Chapter 7: What are the components of a typical UK energy bill?
At the moment, if you are on dual fuel, typically across the country, you pay a bit less than a pound a day. for your electricity and gas combined. About two-thirds of that, 60 pence roughly per day, is electricity, and about 30 pence per day roughly is gas.
For the standing charge.
For the standing charge, exactly. Just under a pound per day. So we recognise, as I say, that a lot of consumers consider that. They get very frustrated by it. So we have looked at what could be done. We've done lots of...
We've looked at various options and we have a pilot project that we're doing with suppliers where they will offer lower standing charge tariffs into the market and we'll see how that goes down, see how they get adopted. So I think that's an important solution.
And we're also doing a longer term project looking at the underlying cost structures in the sector and whether we might change, for example, how that electricity charge, network charge is recovered. It doesn't have to be – that share doesn't have to be fixed in the same way. So those are the sort of questions we're looking at. And I recognize the frustration. We are looking at it.
Are they making profit on the standing charge? So it's all part of that bill. I don't think we separate out profit on the standing charge versus the unit rate. But we do – the price cap has to let the energy companies recover their –
costs so how would that be calculated would you say we look at the fixed costs of an average energy supplier and then we add that we break that down as a rate and then add it into the bill as a standing charge that's pretty much it yeah and you're saying that the standing charge covers you know the fixed costs of the business not the delivery of the energy and the the cost of that it's the call centers it's the it's the fixed costs the the the metering side which um which has some cost
And as I say, it's some of the electricity network charges.
So those are the main components. What are the costs in metering? Because I just report it straight to them, upload it. They used to come over and we need to read your meter, which I understand is a cost, but now we just upload it onto the system. They just slapped me with a crazy bill to incentivize you to call them for the meter reading now.
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Chapter 8: What role do renewable energy sources play in future energy costs?
I didn't find that very encouraging. Didn't like that. It sounded basically like, oh, your bills are going to be higher. But they did say off camera afterwards, your energy consumption is likely to be twice as high by that time. So the bills being the same might be a reduction in the total cost.
But yeah, what I wanted them to say was, oh, no, yeah, bills are going to get much cheaper once we've gone full renewable. But it didn't really feel like that, did it? Yeah. But hopefully people like that kind of interview and we can bring more people on like that, that are behind the scenes, that are in the know, that can answer questions from yourselves.
And we just want to say thank you to everyone that submitted a question as well. They were really good and we're sorry we couldn't answer them all. My favorite was DaFuck1. That's a great name.
Yeah. Yeah. You said it like three times. Just in case you didn't hear that, Mr. Ofgem, DaFuck1.
Okay.
I like the guy that was like hydro energy, whatever. I was like, oh, you're in for it now. Yeah, I love the usernames. He's like, does that guy, hydro energy, whatever. It's like, yes, I've been waiting for this moment. It's like the time that someone said, do you have a question for the energy regulator? Or do they change their usernames?
Just to fit. Yeah, da fuck one. Bring my bills down, one. Yeah, yeah, yeah, yeah, yeah. Yeah.
It was the fruck.
The fruck. It was, wasn't it? Was it the fruck? It was the fruck.
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