Why Are Our Energy Bills Still So High?

Understanding the Price Cap, Wholesale Costs, and What’s Really Driving the Crisis

If wholesale energy prices have dropped, why hasn’t your energy bill followed? For a majority of households across the UK, this contradiction has become a source of confusion and frustration. Despite reports that the energy market has stabilised since the energy crisis, retail prices remain high – and in many cases, unaffordably so.

Changes made to regulator Ofgem’s price cap methodology and frequency, as well as shifting political forces, have ensured that bills have remained high. We argue that rather than the 2021-23 crisis having ended, it simply evolved into a new normal, where customers continue to pay for system failures and hidden costs long after wholesale prices have returned to pre-crisis levels.

A Short History of the Energy Price Cap

The energy price cap was introduced by Ofgem in January 2019 to tackle what was known as the "loyalty penalty" - the practice of charging long-term customers of existing energy suppliers more than new ones. The cap was intended to protect households who had been moved on to a supplier’s default standard variable tariff (SVT) once their fixed deal had ended and if they had not actively switched to a new supplier for whatever reason.

It set a limit on the maximum price suppliers could charge for default energy tariffs — not based on market speculation or profit targets, but on the actual costs suppliers were expected to incur.

These include the cost of purchasing energy on the wholesale market, maintaining infrastructure, paying network fees, meeting environmental and policy levies, and covering administrative costs, plus a modest, regulated profit margin.

Ofgem reviews and compiles these costs into a single "price cap" figure every quarter.

But from its introduction, the cap was misunderstood by many consumers as something that would make their energy bills cheaper. However, it was never designed to make energy affordable nor to shield households from the volatility of international gas markets. Instead, it reflected what Ofgem deemed a "fair" price in a functioning market. That definition did not account for income disparities, fuel poverty, or the rising burden of fixed fees like standing charges - the fixed daily cost made on gas and electricity that consumers pay regardless of how much energy they use.

In its early years, the cap hovered at more manageable levels. For example, in the winter of 2020, the average dual-fuel household bill under the cap was about £1,042. This was considered high at the time but manageable for most. It’s worth noting that at the time, fixed tariffs priced at £250-£300 below that level were available at the time.

Then came the global energy crisis.

How the Energy Crisis changed everything

Starting around autumn of 2021, a perfect storm of events pushed global wholesale gas prices to record highs:

• Post-COVID-19 demand surged
• Supply chains struggled to recover
• Geopolitical tensions, culminating in Russia's invasion of Ukraine, further squeezed supplies

UK energy suppliers were caught off guard. Many smaller firms had failed to hedge against rising wholesale prices, but even those that had were often forced to sell energy at prices below their procurement costs due to the constraints of the government’s energy price cap. This unsustainable mismatch between wholesale costs and retail pricing led to a wave of insolvencies.

Between January 2021 and December 2022, nearly 30 energy suppliers collapsed, affecting more than four million households. These customers had to be transferred to one of the “Big Six” suppliers under Ofgem’s ‘Supplier of Last Resort’ (SoLR) process.

What's actually in your energy bill?

Your energy bill isn’t just about the gas or electricity you use. It’s made up of several components:

Wholesale Energy Costs

This is the portion of the bill that reflects the price suppliers pay to buy gas and electricity on the open market. In 2021, this made up around 40% of the total bill. During the peak of the crisis in 2022, wholesale costs more than doubled. For example:

• October 2021: £528 of a £1,277 annual bill
• April 2022: £1,077 of a £1,971 annual bill

Even though wholesale energy prices have since fallen, they triggered permanent shifts in the structure of pricing. For suppliers who hedged well, there were opportunities to profit by selling excess gas at crisis rates. Those profits, however, rarely translated into customer discounts.

In fact, in Ofgem's current October to December 2025 cap breakdown, the wholesale cost component for electricity and gas is £720 for a typical dual‑fuel household , down slightly from £734 the previous quarter. Despite this fall, the total price cap increased by 2%, from £1,720 to £1,755 annually. This disconnect illustrates how wholesale prices no longer drive the majority of bill changes.

Network Costs and Supplier Bailouts

Network costs – the cost of maintaining the pipes and wires that deliver energy – typically make up around 20% of your energy bill. These have risen gradually over time, but after the energy crisis began, additional charges were introduced to cover the cost of supplier failures.

When dozens of energy firms collapsed, Ofgem enacted the Supplier of Last Resort process to move affected customers to new providers. To recover these costs, a temporary levy was applied to consumer bills. In 2022 alone, this added around £68 to the average household’s network costs.

And these costs continue to climb. In the October to December 2025 price cap, Ofgem reported that network costs had increased to £396, up from £372 in the July to September period, showing no signs of reversing.

Operating Costs and Supplier Profits

Operating costs are meant to cover a supplier’s day-to-day business expenses - things like billing systems, customer service teams, and the maintenance or installation of meters at properties across the UK. These are genuine, recurring costs that suppliers must recover in order to function.

In addition to operating costs, Ofgem also permits energy companies to make a regulated profit, originally set at around 1.9% of the bill for standard variable tariffs. This profit was historically shown as a separate line item in Ofgem’s cap breakdown, allowing consumers to distinguish between costs and corporate earnings.

However, in 2022, Ofgem bundled the profit margin into the broader “operating cost” category, a move that has drawn widespread criticism for reducing transparency at a time when bills were skyrocketing.

• Winter 2021: Operating cost £204 + Profit £23 (itemised)
• April 2022: Operating cost £220 (profit included but not shown separately)

This may seem like a minor adjustment, but the optics mattered. Critics argue that removing the separate line for profits reduced public trust, especially when customers were already struggling with energy insecurity. Many felt that clearly separating out supplier profit could have helped reassure households that their hardship wasn’t directly enriching companies - or, at the very least, would have made the situation more honest.

Instead, this change coincided with record profits being reported by some of the UK’s largest energy suppliers. For instance, British Gas reported operating profits of over £960 million in 2023, a near tripling of their profit from the previous year. Its parent company, Centrica, also saw a surge in earnings during the same period - driven not just by its retail arm, but also by its upstream trading and generation operations.

These figures were particularly galling for consumers who were being urged to reduce usage, wear extra layers, or seek government support to cover basic heating. The optics of giant corporate profits - paired with a less transparent breakdown of consumer bills - amplified public frustration and renewed calls for better regulation and profit caps in the energy sector.

VAT and Other Costs

Energy in the UK is subject to a 5% VAT rate, which is lower than the standard 20% VAT applied to most goods and services. While that rate hasn't changed, the amount of VAT paid by households has soared because it's a percentage of the total bill. As energy costs ballooned during the crisis, so did the government’s VAT revenue.

• Winter 2021 (pre-crisis): VAT on an average dual-fuel bill was around £61
• April 2022 (crisis peak): VAT rose to roughly £98 per household
• October 2025: With the average bill still at £1,755/year, VAT now totals ~£88 per home - still far above pre-crisis levels

Although 5% may seem modest, the real-world effect is that the government collected significantly more VAT revenue during the worst period of the energy crisis - not because it increased the rate, but because bills nearly doubled.

This led to growing calls in late 2022 and 2023 for a temporary VAT suspension or rebate on household energy. Some MPs and consumer groups argued that it was inappropriate for the government to profit - however passively - from record-high energy bills, especially while also subsidising some households through the Energy Price Guarantee.

To date, the 5% rate remains in place. And because VAT is applied to the entire bill - including rising standing charges and network levies - it scales with the system’s increasing administrative and infrastructure costs, not just household consumption.

In addition to VAT, other often-overlooked costs added into the price cap include:

• Renewables Obligations (RO): Paid to support green energy schemes.
• Capacity Market Charges: Designed to ensure future supply by paying generators to be available during peak times.
• SoLR Costs: Costs incurred by suppliers taking on customers from failed companies
• Legacy infrastructure upgrades: Ongoing costs of maintaining and replacing outdated systems

These charges are rarely explained in customer’s bills and are instead rolled into the cap as flat or per-unit costs - making it difficult for the average consumer to understand what exactly they're paying for, or who is benefiting from each line item.

Standing Charges

Standing charges are fixed daily fees that you pay regardless of how much energy you use. These have quietly increased over time. For example, in London:

• 2019: ~20p per day for electricity
• 2024: 53p per day or more
• October 2025: up to 54p/day electricity, 34p/day gas, depending on tariff

That’s over £310 a year just to stay connected to the grid. And you pay this even if you cut back usage entirely.

Some suppliers have recently scrapped standing-charge-free tariffs altogether. For example, Utilita announced in August 2025 that it will migrate customers to standing-charge tariffs starting October, ending its previous no-standing-charge option. Consumers now face high fixed costs even if they use minimal energy.

These charges are especially punishing for:

• Single-occupant households
• Low-income families
• Prepayment meter users

There is growing concern that standing charges are undermining the very behaviours (conservation, reduced usage, smart meter investment) that the government encourages.

Falling prices, but no relief?

So now that wholesale prices have declined since their 2022 peak, why have customer bills remained elevated?

Part of the answer lies in the structure of the price cap itself: while wholesale costs can fluctuate monthly, other components — like standing charges, network levies, and bailout recovery costs — remain stubbornly high. Profit margins are now embedded in more opaque ways, and quarterly cap updates mean any real relief is delayed.

But there’s another key factor: a lack of competition.

After the government’s mass bailout effort during the crisis, many smaller suppliers were forced out of the market. The result? Fewer players and less pressure to innovate or cut prices. Some of the remaining “winners” - such as Greg Jackson of Octopus Energy - have since gained significant influence, with roles advising the government on energy policy.

Meanwhile, many customers remain unsure how their bills are calculated. Ofgem’s headline price cap reflects an average dual-fuel household, but real-world usage varies, meaning actual bills often don’t match the published number.

According to the House of Commons Library, even with falling wholesale costs, energy bills under the October 2025 price cap remain approximately 44% higher than they were in winter 2021/22, despite market volatility easing.

The TDCV Illusion: has energy really gotten cheaper?

To try and give customers an idea of the average energy use of different households, every two years Ofgem publishes its Typical Domestic Consumption Values (TDCVs). 

TDCVs are used to provide consumers with an understanding of the expected energy bill for a typical dual-fuel household in England, Scotland, Wales, and Northern Ireland over the course of a year. These averages are split into three groups of consumers based on their energy use: low, medium, and high.

In October 2023, Ofgem quietly adjusted its Typical Domestic Consumption Values (TDCVs):

• Electricity decreased from 2,900 kWh → 2,700 kWh
• Gas: 12,000 kWh → 11,500 kWh

These numbers are used to calculate the “typical” energy bill. Lowering them makes it appear that average costs have come down. But if your household still consumes 2,900 kWh of electricity, your bill hasn’t changed. You just now appear to be "above average."

This is more than a technicality. It shifts the narrative: prices haven’t gone down; the benchmark has.

This recalibration can impact:

• Government statistics on affordability
• Media reports on "average" energy bills
• Customer expectations around savings

Case Study: same use, higher bill

Let’s say you use 2,900 kWh of electricity over the course of a year - roughly consistent with the UK’s previous "average" household usage.

Your tariff is:

• 35p per kWh
• £200 annual standing charge

That gives you an annual bill of:

• 2,900 × £0.35 = £1,015 (unit cost)
• £200 (standing charge)
• = £1,215 total

But under the newly lowered Typical Domestic Consumption Value (TDCV) of 2,700 kWh, the official “average” bill becomes:

• 2,700 × £0.35 = £945 
• + £200 = £1,145

So even though your usage hasn’t changed, you now appear to be £70 over the national average.

This doesn’t just skew personal budgeting - it also shifts the political narrative.

The government and Ofgem can claim average bills have fallen, while many households still feel their bills are high or even rising. For renters, people in poorly insulated homes, or larger families, this “average” becomes a psychological benchmark they’re constantly failing to meet - even if they’ve reduced usage.

In short: statistical averages don’t always reflect lived reality. And in the context of energy hardship, that gap can feel especially demoralising.

Hedging, Trading, and Uncapped Profit

While many UK households faced energy insecurity in 2022 and 2023, several major energy suppliers were making money - not by overcharging retail customers directly, but by strategically positioning themselves in the global energy market.

The key mechanism was hedging.

Hedging, in this context, refers to energy suppliers buying gas and electricity in advance, locking in prices months (or even years) before they’re needed. When market prices are stable, hedging protects suppliers from fluctuations. But during the crisis, it became an unexpected profit lever.

Firms that had bought large volumes of energy pre-crisis, at 2021 prices, found themselves sitting on assets that had doubled or tripled in value. If they didn’t need all of that energy to serve their own customers, they could resell the surplus on the open market - at the new, sky-high prices - and pocket the difference.

Crucially, the energy price cap only applies to retail tariffs for default customers. It does not apply to the trading arms of suppliers, nor to how much they earn from wholesale transactions, storage, or generation. There’s also no obligation to share those trading profits with retail customers or lower prices in subsequent quarters.

This created a clear divide:

• Small and mid-sized suppliers - often without trading desks or diversified operations - were unable to absorb the wholesale spikes and collapsed in large numbers.
• Large, vertically integrated suppliers - such as British Gas (Centrica) or EDF - were able to weather the storm and, in some cases, profit handsomely.

These companies benefited from:

• Owning generation assets (e.g. nuclear, wind, gas plants)
• Having trading divisions that operate globally
• Hedging strategies that locked in low-cost supply before the crisis hit

The end result: while some firms went bust, others reported record profits. For example, Centrica, the parent company of British Gas, posted £3.3 billion in profits in 2023, with a large portion coming from its upstream activities - including gas production and energy trading.

This dynamic has sparked ongoing public anger and political debate.

In a system where retail prices are capped, yet trading and generation profits are not, consumers are effectively protected from being gouged by their supplier - but not from a system that allows those same suppliers to profit immensely from market turmoil.

Critics have argued that if profits are made during a crisis - especially with public money being spent to subsidise bills - there should be windfall taxes or mechanisms to return value to customers. The UK government has introduced some levies on oil and gas producers, but retail supplier profits from trading remain largely unregulated.

This tension continues to raise difficult questions:

• Should vertically integrated suppliers be allowed to profit from market chaos while retail customers struggle to pay bills?
• Should there be greater transparency about how much of a supplier’s earnings come from trading vs retail?
• And if trading is so profitable during crises, should there be a mandatory mechanism to pass on gains in the form of lower bills or rebates?

For now, the system does not require it. And as long as these structures remain unchanged, the perception that energy companies “win” while households lose will continue to undermine public confidence - even in a price cap designed to offer protection.

What can be done?

Reform proposals include:

• A social tariff for vulnerable customers
• Cap or regional adjustment of standing charges
• Separation of profit margin from operating costs for transparency
• Clearer communication around TDCVs and averages
• Annual cap rather than quarterly volatility

In July 2025, Ofgem announced it was exploring new low- or zero-standing-charge tariff options, with potential rollout in early 2026. This marks the first formal recognition that standing charges may be distorting fairness and conservation incentives.

These ideas are gaining traction but have yet to be implemented. In the meantime, households are expected to navigate a complex and often opaque billing system with little recourse.

Conclusion: still afflicted by the Crisis, but competition is the cure

Energy prices may no longer be in crisis mode, but bills haven’t reflected that. The structure of pricing has shifted to protect suppliers over consumers. And with Ofgem’s price cap methodology now more complex and less transparent than ever, many households are left wondering why their sacrifices aren’t being rewarded.

Until these structural and statistical imbalances are addressed, the average household will continue to feel the pinch, not because they’re using too much energy, but because they’re trapped in a system still recovering from its own failures.