Where Policy Actually Has Leverage

The UK energy system is resistant to reform. But it is not immovable. There are points where policy could shift outcomes. Where intervention could reduce bills. Where changes, even incremental ones, would make a real difference to consumers. Not by transforming the system entirely. That is politically impossible. The vested interests are too strong. The ideology is too entrenched. But incremental change is possible. If the political will exists.

Because every element of the system is a policy choice. Marginal pricing. Network regulation. The price cap. Standing charges. Green levies. All of these were designed. By government. Through legislation. Through regulation. And what was designed can be redesigned. The question is not whether solutions exist. They do. The question is whether there is will to implement them. And whether that will is stronger than the resistance.

Let me show you where UK policy actually has leverage over energy bills.

The first point of leverage is reforming marginal pricing. The current system pays all generators the price set by the most expensive generator needed. Usually gas. And this creates windfall profits. For renewables. For nuclear. They generate at low cost but sell at gas prices. And consumers pay gas prices even when most electricity comes from wind.

Reforming this would help. Immediately. One option is zonal pricing. Different prices in different regions. Based on local generation. Areas with lots of wind pay lower prices. Areas reliant on gas pay higher prices. This creates incentives. For generators to build where prices are high. For consumers to locate where prices are low. And it reduces windfall profits. Because renewables no longer get paid the national gas price. They get paid the local price. Based on local supply and demand.

Another option is split markets. Renewables sell into one market. At prices reflecting their cost. Gas sells into another. At prices reflecting gas costs. Consumers buy from both. But pay different prices for each. This reduces the link between gas and renewables. And reduces windfall profits.

The political obstacle is generators. They profit from marginal pricing. And they resist change. They argue it will reduce investment. Reduce security. But the evidence from other countries, from systems with zonal pricing, shows that investment continues. Because investors respond to prices. And if prices fall in one zone, they invest in another. Where prices are higher.

The second point of leverage is controlling network costs. Networks, the National Grid and DNOs, earn regulated returns. Based on their asset base. And the more they invest, the more they earn. This creates an incentive to over-invest. To gold-plate. To build infrastructure that is not urgent. Because building generates revenue.

Regulating more tightly would help. Ofgem could reduce allowed returns. From seven or eight percent to four or five percent. Still profitable. But less excessive. And Ofgem could scrutinize investment plans. More rigorously. Reject investments that are not justified. That are not urgent. That are driven by profit, not need.

And network costs could be funded differently. Not through bills. But through general taxation. Because networks are public infrastructure. Like roads. And funding them through taxation, progressive taxation, would be fairer. Lower-income households, who use less energy, would pay less. Higher-income households would pay more. And standing charges, which are regressive, could be reduced. Or abolished.

The political obstacle is networks. And their investors. Who lobby. Who argue that reducing returns will reduce investment. Will threaten reliability. And foreign investors, sovereign wealth funds, who own networks, pressure government. Diplomatically. To protect their returns.

The third point of leverage is reducing standing charges. Standing charges are fixed daily charges. That you pay regardless of usage. And they are rising. Faster than unit rates. Because network costs are rising. And those costs are recovered through standing charges.

Reducing or abolishing standing charges would help. It would make bills more responsive to usage. More fair. Low-usage households would pay less. High-usage households would pay more. And the incentive to conserve would be stronger. Because conservation would actually reduce bills. Meaningfully.

The cost, the network costs currently recovered through standing charges, could be recovered through unit rates. Or through taxation. And this would shift the burden. From low-usage households to high-usage households. From poor to rich. Because high-usage correlates with income. Larger homes. More appliances. More consumption.

The political obstacle is networks. Who prefer standing charges. Because standing charges are guaranteed revenue. Regardless of usage. Unit rates are variable. Depend on consumption. And networks, wanting certainty, resist the shift.

The fourth point of leverage is insulating homes. The UK housing stock is poorly insulated. The worst in Western Europe. And poor insulation increases energy demand. Households need more energy to heat poorly insulated homes. And higher demand drives up bills. And drives up wholesale prices.

A national insulation program would help. Massively. Fund insulation for every home. Free. Or subsidized. Starting with the poorest households. The most energy-inefficient homes. And this would reduce demand. Permanently. Bills would fall. Not just for the households insulated. But for everyone. Because aggregate demand would fall. And lower demand would reduce wholesale prices.

This is expensive. Upfront. Tens of billions. But the return is enormous. Lower bills. For decades. Reduced carbon emissions. Improved health. Warmer homes. And the cost, spread over decades, is small. Compared to the cost of high energy bills. Which consumers are already paying. Every year.

The political obstacle is the Treasury. Which sees insulation as capital spending. And resists. Because it increases public debt. In the short term. Even though it saves money. Massively. In the long term. And even though consumers are already spending, through high bills, far more than insulation would cost.

The fifth point of leverage is public ownership of generation. The government could build renewable generation. Wind farms. Solar farms. Owned publicly. And sell the electricity at cost. Not at market prices. Not at gas prices. At the cost of generation. Which, for renewables, is low.

This would reduce bills. Because publicly owned generation would undercut private generators. Set lower prices. And private generators, facing competition, would reduce prices. Or lose market share. And consumers would benefit. From cheaper electricity. From competition.

And public generation would capture the windfall. The profits that currently go to private generators. When gas prices are high. Those profits would go to the government. To taxpayers. And could be used to reduce bills. Fund insulation. Fund further renewable investment.

The political obstacle is ideology. Public ownership is seen as socialist. As anti-market. As going backward. And politically, it is toxic. To the right. And to much of the center. So even though public generation would reduce bills, would benefit consumers, it is politically difficult. Because it challenges the market orthodoxy.

The sixth point of leverage is windfall taxes on generators. When gas prices spike, generators profit. Windfall profits. That they did not earn. Through effort. Through innovation. But through market conditions. And those profits could be taxed. Heavily. And the revenue used to reduce bills. To fund insulation. To support vulnerable households.

The UK introduced a windfall tax during the energy crisis. On oil and gas companies. But it was weak. Temporary. And full of loopholes. Investment allowances. That reduced the effective tax rate. And the tax excluded electricity generators. Renewable generators. Who also made windfall profits. From selling at gas prices.

A proper windfall tax would help. Applied to all generators. Oil. Gas. Renewables. Nuclear. Based on excess profits. Profits above a reasonable return. And with no loopholes. No investment allowances. Just a straightforward tax. On windfall gains.

The political obstacle is generators. Who lobby. Who threaten to reduce investment. To leave the UK. And politicians, fearing that outcome, water down the tax. Make it temporary. Make it weak. So it raises some revenue. But not enough. And does not fundamentally shift the balance.

The seventh point of leverage is social tariffs. A social tariff is a lower rate. For low-income households. For people on benefits. For pensioners. For disabled people. And it is funded. By higher rates for everyone else. Or by general taxation. Or by windfall taxes.

Social tariffs exist in other sectors. Water. Broadband. And they work. They target support at those who need it most. And they reduce energy poverty. Reduce the number of households choosing between heating and eating.

The UK does not have a mandatory social tariff for energy. Some suppliers offer them. Voluntarily. But take-up is low. Because awareness is low. And eligibility is narrow. A mandatory social tariff, applied by all suppliers, with broad eligibility, would help. Millions of households. Immediately.

The political obstacle is suppliers. Who argue that social tariffs are complex. Expensive to administer. And that they create cross-subsidies. Higher bills for some. To fund lower bills for others. But the alternative is energy poverty. Is cold homes. Is debt. And a social tariff, properly designed, is fairer. More progressive. Than the current system.

The eighth point of leverage is reducing reliance on gas. For heating. For electricity generation. Gas is expensive. Volatile. And as long as the UK depends on gas, bills will be vulnerable. To global price shocks. To supply disruptions. To geopolitics.

Alternatives exist. Heat pumps. For heating. Battery storage. For balancing renewables. Hydrogen. For industry. For backup generation. And electrification. Electric heating. Electric vehicles. All of these reduce gas demand. And reducing gas demand reduces bills. Reduces volatility. Reduces dependency.

But the transition requires investment. Public investment. In heat pumps. In insulation. In grid upgrades. In storage. And the transition takes time. Decades. So this is not a quick fix. But it is the long-term solution. And the sooner it starts, the sooner bills stabilize.

The political obstacle is cost. And disruption. Heat pumps are expensive. Require homes to be well-insulated. Require larger radiators. And many households cannot afford the upfront cost. Cannot afford the disruption. So the government must fund it. Subsidize it. And the Treasury resists. Because it is expensive. Upfront.

The ninth point of leverage is transparency. Energy bills are opaque. Complex. Consumers do not understand them. Do not know how much they are paying for generation. For networks. For green levies. For VAT. And this opacity protects the industry. From scrutiny. From accountability.

Mandating transparency would help. Break down bills. Line by line. Generation cost. Network cost. Supplier margin. Green levies. VAT. Show consumers exactly what they are paying for. And why. And this would create pressure. For reform. Because consumers, seeing that network costs are high, that standing charges are rising, would demand action.

And transparency would expose profiteering. Windfall profits. Excessive returns. And that exposure would create political pressure. For windfall taxes. For regulation. For reform.

The political obstacle is industry. Who resist transparency. Who argue that bills are already clear. That more detail would confuse consumers. But the real reason is that transparency threatens them. Exposes them. And makes it harder to justify high costs. High prices.

So here is where policy has leverage. Reform marginal pricing to reduce windfall profits and decouple electricity from gas. Regulate networks more tightly to control costs and reduce standing charges. Abolish or reduce standing charges to make bills fairer and strengthen conservation incentives. Fund a national insulation program to reduce demand permanently. Build public renewable generation to undercut private generators and capture windfall profits. Impose proper windfall taxes on all generators without loopholes. Introduce mandatory social tariffs for low-income households. Accelerate the transition away from gas through heat pumps and electrification. And mandate transparency to expose costs and create accountability.

Each of these would help. Some more than others. Some are easy. Some are hard. But all are possible. The obstacle is not technical. It is political. The will to act. The courage to override industry resistance. The willingness to prioritize consumers over generators. Over networks. Over ideology.

Most governments do not have that will. So the levers exist. But they are not pulled. And the system stays as it is. Expensive. Volatile. Profitable for generators and networks. And punishing for consumers.

The final article will show you a case study. The 2022-23 energy crisis. How it happened. Why bills soared. Who profited. And what it reveals about the UK energy system. Because the crisis was not an anomaly. It was the system. Working exactly as designed. Amplifying external shocks. Extracting maximum profit. And leaving consumers to pay.