The electric shock: Causes and consequences of electricity prices in the United Kingdom

Abstract

This study explores the primary causes of wholesale electricity price fluctuations in the United Kingdom (UK). Using the structural vector autoregression (SVAR) model that identifies both supply-side and demand-side shocks, and monthly data for the period from January 1996 to May 2022, the findings show that the impact of electricity price increases on the real electricity price is dependent on the underlying cause of the price increase. Electricity price movements in the most recent period of global hardships from 2020 to 2022, including the Covid-19 pandemic and the Russian invasion of Ukraine, are further examined, which were widely discussed to have affected the global energy segment. The findings show that although shocks to natural gas had a part to play in the recent price increase of electricity, some major contributing factors remain unique to the UK. Finally, the findings put into perspective and question the effectiveness of the energy cap considering the large contribution of renewable power generation.