Energy costs are rising, with wholesale gas prices surging as the conflict in the Gulf continues, but there is a silver lining to the clouds: electricity prices in Britain are rising much more slowly, and may have begun their long-awaited decoupling from gas prices.

Andrew Sissons, the director of sustainable future mission at charity and innovation agency Nesta, predicts that from October, a typical household gas bill will be 33 per cent higher than in April, a £200 increase in the annual bill. Electricity bills will have risen just 4 per cent over the same period.

A degree of that is down to the removal of VAT from electricity, but bills would only be 9 per cent higher without that change. EDF’s forecast for January suggests this trend will continue into next year, with household gas prices rising by 77 per cent since April and electricity prices up by only 29 per cent.

Gas and electricity bills are normally closely linked, because gas-fired power plants mostly set the unit cost of electricity, and therefore play a major role in setting prices. When household gas prices rose by 88 per cent after Russia’s invasion of Ukraine in 2022, electricity prices rose by 68 per cent, but this time around, electricity is much less affected by the crisis.

What’s changed? Electricity spot prices have generally increased in line with gas prices. But now, contracts for difference (CfDs) have been a key agent of decoupling. When market prices for electricity rise, CfD prices do not, instead, they “pay back” more to energy customers. With a growing share of electricity covered by CfDs and with newer, cheaper renewable CfDs coming on stream this causes overall electricity prices to rise by less than gas prices.

Yet this good news is a hard to sell; energy bills may be rising less than they would have done. Furthermore, it swings both ways, for if gas prices were to fall significantly, electricity prices are less likely to follow them.

In short, electricity is increasingly a fixed cost system, whilst gas rises and falls.

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