The UK has some of the highest electricity prices in the world. It has become fashionable to blame this on net-zero policies, green levies or the cost of renewables. But those explanations miss the point. Wholesale prices are only 30–45% of the retail price, not far from the share of various levies and taxes. The real cause lies in poor market and system design, not decarbonisation.
The very expression ‘market design’ reveals a paradox. Prices should provide information, not be an instrument of control. The British electricity system remains centralised, administratively rigid and poorly priced. Recent governments have had little or no vision regarding the shape of a future power system.
Pretend market
Although Britain once led the world in power-sector liberalisation, the existing structure is neither competitive nor efficient. Most retail customers still face flat tariffs that bear little relation to time-of-day prices or grid conditions. As a result, there is no incentive to shift demand from peak, expensive and most polluting periods to less pricey ones, making electricity more expensive for everyone.
When gas prices spiked in 2022, the entire power price structure spiked with them, handing large windfall profits to low-cost generators and political headaches to ministers. Marginal pricing itself is not the problem as markets must reflect marginal costs, otherwise the system would face shortages. But the British electricity system has few market instruments to let those price signals function properly. Demand response, dynamic tariffs and local balancing remain the exception rather than the rule.
Add to that a plethora of policy charges, grid fees and social levies, and it becomes hard to tell what consumers are actually paying for. The result is a system that is liberalised but bursts the with distortions of central planning, combining the inefficiencies of that system with those of markets.
FIG.1: POWER PRICES IN THE UK AND SELECTED COUNTRIES
| Key features | ||
| Germany | High taxes but well-functioning market and interconnections | |
| Australia | ||
| 0.25–0.30 | Hydro-based, real-time markets |
How others compare?
Across the developed world, systems that pair renewables with flexible markets perform better (see Fig.1).
Germany shows that high taxes need not mean high inefficiency. France benefits from consistent policy and a stable, legacy nuclear base. California and the Nordic countries, through dynamic pricing and cross-border trading, manage renewable variability efficiently. The UK, by contrast, manages to inherit the downsides of both competition and control.
Problem is not ‘net zero’, but ‘system design’
Decarbonisation does add to the system complexity, but it is not inherently costly. Wind and solar are now the cheapest forms of new generation almost everywhere. The UK’s real issue is integration.
Curtailment payments, constraint costs and underused interconnectors cost billions each year. These are the predictable consequences of a market still organised for central dispatch rather than distributed flexibility. If consumers cannot respond to price, and local systems cannot balance themselves, efficiency is impossible, regardless of the generation mix.
The priority is not to scrap net zero but to modernise the market architecture. Smart meters, dynamic tariffs and local price signals should allow households and firms to adjust consumption in real time. Without that, the energy transition remains expensive, polluting, inefficient and politically fragile.
From mainframe to internet
The electricity sector today resembles computing in the 1970s: vast centralised ‘mainframes’ feeding passive terminals. Computing became cheap and universal only when networks became distributed and intelligence moved to the end-users. Electricity systems will evolve the same way.
Future households and businesses will generate, store and trade their own energy through solar panels, batteries and electric vehicles. Power will flow in multiple directions, coordinated digitally rather than centrally dispatched.
This shift means less investment in expensive, long-distance transmission and more in cheaper, smart distribution, local storage and software. Instead of large, expensive power plants and pylons, the industry will rely on power nodes and networks.
The grid will look less like a state-run utility and more like an internet-based, decentralised, resilient and interactive system of exchange.
The market for flexibility
In that world, kilowatt-hours become a commodity and flexibility, or optionality becomes the true market product. Consumers will also be producers—or prosumers. Utilities will sell stability and system services, not just energy. Trading will shift from volume to availability, optionality and responsiveness. Future power systems will look less like national infrastructure and more like a networked platform, a shift as profound as the move from mainframe computing to the cloud.
The UK’s electricity problem is not its ambition to decarbonise but its failure to let markets work. The future system will not be cheaper because it is greener. It will be cheaper because it is smarter, distributed and—perhaps once again—direct.
A quiet return of direct current
Another structural change is emerging almost unnoticed. Virtually every modern device—such as electric vehicles (EVs), heat pumps, LEDs, laptops and datacentres etc. —operates using direct current (DC). So do solar panels and batteries. The alternating current (AC) grid, a product of the 20th century’s long-distance, centralised model, is increasingly looking like an awkward intermediary.
Each DC/AC conversion wastes energy. Generated solar power is converted to AC use, only to be used again in DC-driven LED lights, computers and so on. Typical energy losses involved in such conversions can easily reach 20%. DC systems that link generation, storage and load directly can cut those losses and improve safety and reliability.
Local DC microgrids already make economic sense for campuses, industrial parks and EV fleets. AC will eventually become a backup and long-distance transmission, but the everyday power economy is likely to run on DC once again. Only this time, it will be managed by digital control in distributed systems.
Eventually, Thomas Edison may have the last laugh at Nikola Tesla.
Dr Adi Imsirovic is a lecturer in MSc course in Energy Systems, University of Oxford, and director of Surrey Energy, a consultancy. This article is taken from our Outlook 2026 report. To read Outlook in full, click here.
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