Written evidence submitted by National Grid (COE0080)

This response to the Energy Security and Net Zero Committee Call for Evidence on “The Cost of Energy” is from National Grid plc (NG).

Cost of energy is high in the UK, therefore a focus on affordability is critical, alongside the creation of a cleaner, more secure energy system

Energy costs in the UK, both domestic and industrial, are high compared to other countries, resulting in around 40% of bill payers struggling to afford energy[1] and UK businesses facing higher electricity costs than competitors in other countries. For example, prices in France are 31% lower for small businesses rising to 53% for the very large[2]. The UK’s relative energy prices to International Energy Agency (IEA) members are shown in the graphs below.

In the UK energy costs are higher because of our high exposure to international gas prices relative to many other countries.  Gas is the major fuel for heating and sets the price in our wholesale electricity market for much of the time.  Other countries rely less on gas for heating and have more nuclear, hydro and coal in their electricity generation mix than the UK.  Many of the non-EU countries shown also do not have carbon pricing.

The UK’s relative exposure can be seen particularly since Russia’s invasion of Ukraine, where the UK has been exposed to very high and volatile gas prices. The UK needs a more affordable energy system, whilst also becoming cleaner and more secure by becoming less dependent on imported gas.

There is an intrinsic link between two of Government’s core missions: growth and making Britain a clean energy superpower. The energy system needs to support the growth of demand from expanding and new industries in the UK.  Energy prices are a significant input cost to new data centres for Artificial Intelligence and the decarbonisation of foundational industries. NESO suggests that by 2035, annual demand could increase by almost 50%, from 285 TWh in 2023 to 425TWh in the Electric Engagement scenario[3].

There is a risk that high energy prices may impact growth, particularly for energy intensive industries, if the UK is not cost competitive with international peers. 

The Clean Power 2030 Action Plan[4] sets out the trajectory for the UK to significantly reduce emissions whilst increasing system security.  This will help to protect households and businesses from price shocks by reducing our exposure to gas prices. This requires unprecedented levels of investment in energy. The Government is clearly focussed on affordability and the competitiveness of UK industry, but we believe there needs to be more joined up thinking between the UK growth and clean energy missions.

A holistic review of energy bills and their likely trajectory is required. The review should consider how costs could be reduced, assess the distribution across bills and identify how support can be provided to those who need it most

There are four main drivers of energy bills; wholesale, policy, networks and system operation:

• Wholesale costs pay for the energy bought to supply homes and businesses. This element makes up the majority of the bill.
• Policy includes environmental and social obligation costs which cover policies to support low carbon forms of generation (nuclear, wind and solar) through Contracts for Difference, schemes to support energy efficiency improvements in homes and businesses, help vulnerable people (e.g. warms homes discount) and legacy schemes to support the renewable technology (e.g. Renewable Obligation).
• System operation which includes the cost of balancing supply and demand second by second and constraint costs.  These occur when the network cannot physically transmit power from one region to another, requiring NESO to incur costs by paying generators to reduce their output to maintain system stability.
• Network costs pay for maintaining, running and upgrading the electricity transmission and distribution networks that carry energy across the country into homes and businesses.

There is no silver bullet to reducing customer and industrial energy bills.  A holistic review of energy costs is required, by looking at the cost drivers through three lenses - how these costs could be reduced, the distribution of costs across fuel bills (gas and electricity) and demographics as well as what support could be provided for vulnerable customers for example through a social tariff.

At National Grid, we are fully committed to protecting and supporting customers in vulnerable situations. In February, we launched a £13.8 million Grid for Good Energy Affordability Fund[5] which will run for three years, with £3.5m per year donated to charities and organisations providing immediate financial relief to vulnerable households in the UK. 

In addition, National Grid Electricity Distribution’s fuel poverty programme has now been in operation for a decade. With energy debt at record levels, the programme has never been more important to our customers, supporting 23,705 customers to save over £23.4m in the year 2023/24. Our programme consists of two core projects:

• Power Up: Through proactive contact with customers on our Priority Service Register (PSR), our trained advisors identify when customers might be struggling with their energy costs and refer them directly to our Power Up lead partners to help them save money and improve the energy efficiency of their homes.
• Affordable Warmth: Our lead Affordable Warmth partners identify and support customers in fuel poverty across our communities and make referrals to our PSR. Our partners use a network of trusted local organisations to provide one-to-one support to customers.

In addition to households, UK businesses also require support to be competitive with their international peers. There is targeted support today through the British Industry Supercharger measures that provide energy bill relief to energy intensive industries. This provides a 60% reduction in network charges and fully exempts eligible firms from certain costs linked to renewable energy policies, including the small-scale Feed in Tariff, Contracts for Difference and the Renewables Obligation, as well as GB Capacity Market costs.

We think any review should consider whether support could be extended to other UK businesses.  The distributional impacts of additional support will need to be understood. If energy costs are reduced for businesses, these costs will need to recovered through another route, therefore it is critical to understand the broader impacts on energy bills, particularly households.

Investing in infrastructure is critical to ensure affordability in the longer term

To reduce energy bills over the next few years, it is essential that the UK continues to invest in the infrastructure required to meet our energy needs today and in the future. The impact of infrastructure investment on energy bills is two-fold. By reducing the UK’s reliance and exposure to volatile gas imports, the UK can decrease the wholesale cost of energy and reduce the risk of further gas price spikes increasing bills. Introducing more renewables into our energy system lowers wholesale prices, protect consumers from gas price spikes and increase security of supply.

Building more electricity infrastructure i.e. transmission and distribution networks, will reduce system constraints[6]. By increasing the capacity for energy to flow around the system to where it is required, ‘constraints’ will costs be reduced. 

Ofgem uses a price control framework called 'RIIO'[7] to regulate GB’s electricity network companies, with the costs being recovered over 40+ years to smooth the impact on consumer bills over time. National Grid have recently submitted our business plan for transmission network investment in 2026 – 2031 (RIIO-T3). This plan will provide up to £35bn of investment, connecting up to 35GW of new generation and storage, delivering 19GVA of demand connections for projects like giga factories and data centres and nearly doubling the power that can flow across the country.

We estimate through our RIIO-T3 business plan[8] that our share of the average annual domestic bill will be offset by £12 billion in avoided constraint costs (paid via the Balancing Services Use of System charge) over the 5 years that consumers would incur if we did not invest. In 2031 the constraint savings from RIIO-T3 investments are worth £40/bill. We estimate NGET’s share of the average annual domestic bill (paid via transmission charges) will increase from £23 in 2026 to £44 in 2031. The reductions in cost will be greater than the cost of the additional infrastructure.  So this investment will not increase customer bills but will derisk them from increases in bills if gas prices rise in future.

Investing in electricity infrastructure not only supports a reduction in energy bills, it also provides broader consumer benefits by underpinning economic growth, delivering a more secure energy system and increasing access to clean, green power sources.

The distribution networks also play a critical role to connect new businesses, generation, homes and enable the electrification of heat and transport. The National Infrastructure Commission (NIC) recently published a report[9] noting nationally, £37-50 billion of investment in the distribution network could be needed to support additional demand and generation between today and 2050. These costs could be offset by gas and fuel bills as more consumers switch to electric vehicles and heat pumps. The price control period for distribution runs at different timescales to transmission, therefore we are currently building our business plan to unlock consumer benefits at the local level.

April 2025