The UK has a power pricing puzzle to solve. Renewable energy costs have fallen, but local consumers face some of the highest electricity bills in the world. Fixing this disconnect may be crucial to success for the energy transition.

Renewable energy costs are hitting record lows, but the price of electricity is four times that of gas. This is even as onshore wind and solar have become the cheapest forms of new generation. Given the reliance of the energy transition on electrification, this poses a fundamental problem.

“High electricity prices will cause resistance to the take-up of electricity-based solutions. That’s just a fact,” DNV regional director for UK and Ireland energy systems Hari Vamadevan said last week.

“That’s a challenge for any country that has high electricity prices and the UK has some of the highest. But our European cousins aren’t far behind,” he said.

Vamadevan spoke ahead of the UK Energy Transition Outlook (ETO) launch. The UK’s electricity price is set by the most expensive power unit, often gas. As renewable generation increases, the cost of that gas-fired power unit will rise.

*DNV regional director for UK and Ireland energy systems Hari Vamadevan*

From pain to partner

“The fact that we have the highest electricity prices in the world is a major showstopper”, he said. These high energy prices are a problem for the energy transition “especially when it comes to societal acceptance and support. I’m sure all governments are looking at trying to bring the cost of energy down.”

High power prices have an impact on consumers and create risks for generators and the sector.

If industry leaves Europe, Florence Carlot, a partner at Arthur D. Little in Belgium, said, “all the investments around production, around transmission, around distribution are useless”.

There is a need to reconsider how consumers and providers work together. “Either you protect the demand and accept [the idea of] sharing the benefits and risks … or you just accept that industries will leave and that only the larger players will be able to survive.”

Europe will struggle to compete on energy costs alone, she continued. This drives the need for a new approach in the sector.

Carlot called for a new collaboration model between providers and users. There’s a need for innovation on “contracting and pricing models,” she said. “We need to see more of a mindset of partnership … where the opportunity is shared between both players.”

System planning

Collaboration is easy in the abstract but challenging in practice. New partnerships between generators and consumers make sense, given the challenge, but government intervention will be crucial to make this work.

Carlot said the UK is a “great example” for achieving this. The National Energy System Operator (NESO) is working on the strategic spatial energy plan (SSEP), aiming for a 2026 delivery.

This aims to provide a system view of how the needs and possibilities in the UK’s system can align.

Carlot said Europe was being pulled in too many directions. Electricity and gas providers are talking their own book.

“Somebody needs to provide that North Star, because of course you are biased as an electricity player or gas player. You cannot be neutral, especially considering the volume and the extent of the infrastructure investment that is needed.”

Interconnection

The challenge extends beyond the UK’s borders. European countries are pursuing different strategies, so co-ordination becomes crucial. “We need a system planner at EU level to allow that scale impact”, said Carlot.

“Today, markets are interconnected”, she said, calling for governance and system considerations to adapt accordingly.

While the SSEP and NESO are positives for the UK, challenges remain. The UK has left the EU, but power line connectors remain and are becoming more important.

Europe has the “largest and busiest grid in the world. Interconnectors with the UK strengthen the system,” Rebecca Sedler, managing director of National Grid Interconnectors, said at the ETO launch.

“What’s integral are market frameworks work efficiently, around carbon policy, market reform is done not just through a UK lens, but through an EU lens.”

Interconnection can help fill gaps when solar and wind underperform, Vamadevan said. “You need dispatchable power, from gas or hydrogen, or you need stronger relationships with your neighbours and your interconnectors.”

Sedler cited offshore hybrid assets (OHAs) as an instance where reforms could be effective. These interconnectors involve offshore wind. “We haven’t made progress, we haven’t delivered incentives to different developers to come together and co-ordinate.”

Progress would reduce the impact on communities by cutting construction and also cut rare earths consumption.

Dan McGrail, CEO of RenewableUK, said OHAs will become more of an issue in the future. “Within five years we’re going to have floating offshore wind in Scotland competing against potentially [OHA] assets in the Southern North Sea. A payer clears auction is not necessarily the best outcome for the consumer. There needs to be some proper thinking.”

Competitive mindset

The energy transition faces growing political headwinds, notable in the US with President Donald Trump’s repudiation of the “green new deal”. But the economics remain compelling.

DNV’s Vamadevan said countries and companies must focus on the long term. “The waves can be all over the place, but the current is only going in one direction. The trick is to stay focused on long-term currents and not be too knocked over by some of the short-term waves.”

In recent years, the commercial success of battery storage has been remarkable, coming through seizing opportunities in short-term power price swings.

Reducing the role of hydrocarbons – that is power that can be easily stored or traded – and relying on other energy forms presents a challenge.

DNV sees a continued role for gas in the short term. The government targets less than 5% for gas by 2030, but DNV sees it at 12%, down from 37%.

In 2030, DNV forecasts renewable energy generation to reach 90 GW, below the target of 135 GW.

The consultancy sees onshore renewables as the “most efficient way to generate electricity”, energy transition director Frank Ketelaars said. “We see a shift from offshore to onshore, driven by significant increases in cost for delivering offshore projects, both in the UK and globally.”

RenewableUK’s McGrail disputed some of these projections. He would be “disappointed” if the country only managed 30 GW of offshore wind by 2030, while describing the onshore wind projection as “quite punchy”.

*DNV energy transition director Frank Ketelaars*

Project economics

These global shifts, combined with galling renewable energy costs, present an opportunity for the UK. Vamadevan, for one, sees a positive.

“Any company based in the UK aims to attract investment and deploy locally. That hasn’t changed,” he said. “If fewer people are trying to buy the things that we want to buy, well that’s good news for us we should double down and seize the opportunity.”

Despite a challenging global environment, he said, “the local sentiment has got better. For real progress, the challenge is project economics.”

The energy transition must succeed in the UK to regain control of power pricing and the country’s industrial future. Domestic gas production is declining in the UK and Europe, irrespective of governmental action.

New power sources must be economically viable to succeed. In the near term, this is a challenge. Companies are cutting investments in renewables worldwide, as seen recently with Equinor and BP.

Least regret

Plans are still moving ahead, backed by contracts for difference (CfDs) and other regulatory steps.

Success requires a broader view of system planning. NESO and its strategic plan are a start, but the government must also improve the CfD programme and work to deliver power where needed.

High power prices threaten industry and transition politics. Recognising this and rethinking the relationship between generators and consumers will be crucial to maintain momentum.

“There’s a difference between cost and price,” DNV’s Vamadevan said. “The lowest cost electricity is onshore renewables, that’s just a fact. How it translates to price is a completely different story. So the lowest cost of energy will be renewables – it just doesn’t feel like that because of our market mechanisms.”

The solution requires action on multiple fronts. We need to reform market mechanisms to better reflect renewable costs, foster new partnerships between generators and users and co-ordinate planning across borders.

Get this right, and the UK can unlock cheaper bills. But it would also maintain its position at the forefront of the energy transition – even as global headwinds grow stronger.

Download DNV’s UK Energy Transition Outlook 2025 report here.

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