War in Iran has thrust energy to the top of the political agenda. Around 20% of global oil and gas supply has been lost because of the closure of the Strait of Hormuz, while airstrikes have destroyed 17% of Qatar’s LNG export capacity. This has sent energy prices soaring, including in the UK where diesel prices have risen by 26% and jet fuel costs have doubled since the conflict began. Once again our energy supplies have been at the mercy of global events that we have little control over. Since North Sea oil and gas output began to decline around the turn of the millennium - a trend being accelerated by this Labour government - we have become increasingly reliant on imported energy, making us more exposed to geopolitical shocks.

Before the latest conflict in the Middle East threw the spotlight onto energy security, much of the UK energy debate had focused on energy costs. This is with good reason: we have the most expensive industrial electricity prices among developed economies, according to government figures. We have among the highest household electricity prices too, and are beaten by Germany to the top spot only because they heavily subsidise their industrial prices by shifting costs on to the public. Expensive electricity is disastrous for the cost of living and the competitiveness of our economy. But it is also damaging for efforts to decarbonise, as it harms public support and reduces the significant cost saving potential of switching to an electric car or clean heating system.

It was timely therefore for Prosper UK to convene a roundtable of businesses and experts to discuss the drivers of the UK’s high electricity prices and some potential solutions. This was the first meeting in a series of conversations which will consider how we can deliver cheaper energy for households and businesses, while also continuing the UK’s record on decarbonisation.

There was broad agreement among participants about the starting point: the government needs to stop adding policy costs on to bills, and start relieving the pressure from existing levy-funded schemes. An increasingly complex and expensive thicket of state-imposed levies now make up 17% of the household electricity bill, and its share is rising. The solution ultimately entails taking more of these circa £15 billion per year policy costs off bills and funding them out of general taxes. Given the UK’s poor fiscal position, this means identifying spending cuts or tax rises elsewhere to pay for it. The policy therefore comes with a hefty price tag, even if the net cost would be lower because of the additional tax receipts that would flow from the greater economic activity from cheaper energy.

We noted how many of these levies do not relate to the investment costs of building infrastructure, but rather fund discretionary ministerial priorities like fuel poverty alleviation, innovation, and industrial growth. All of these are important policy goals, but the decision to fund them through energy bill levies is increasingly hard to justify. Compared to general taxation, levies are regressive, and so are borne disproportionately by the least well off. If ministers are unable to make and win the argument for higher taxes to fund their policy priorities, they should not seek to impose them via stealth charges through energy companies.

Some of the levies reflect legal commitments the government has made to finance renewable or nuclear energy, for example. It is therefore not straightforward simply to scrap them entirely, at least not without damaging the confidence of energy investors and raising the cost of capital for future energy projects. But the costs can be redistributed from bills on to general taxes. The government has made a start on this at the last Budget, but needs to go further, for example by funding the remaining 25% of the Renewable Obligation scheme and the Feed-in Tariff costs out of general taxes and removing the levies from industrial energy bills too.

Another growing pressure on bills we discussed was the cost of balancing the grid, which has become more challenging as more wind and solar has been built. The bill for switching off wind farms when there is not enough demand is set to rise sharply from around £1.6 billion now to potentially £8 billion by the end of the decade. The long-term solution is building more pylons and cables to carry the excess power from where it is produced to where it is consumed. Building this new grid infrastructure is a significant cost itself, however, especially with lengthy planning delays, protracted legal challenges, and demands for expensive solutions like undergrounding. In the meantime, rising constraint costs are undermining public support for clean energy and could become a political millstone by the next general election.

Solutions like zonal pricing - which would push down prices in areas where there is a surplus of supply, thereby incentivising more demand - are intellectually appealing, but have been ruled out by this government to avoid harming investor confidence in the renewables sector. Other solutions to constraint payments include encouraging private investment into new sources of demand in regions with an abundance of power generation, such as data centres, bitcoin mining, and battery storage. At the same time, if more households and businesses opted to allow suppliers to flex their energy consumption to reflect variable generation and harnessed time-of-use tariffs and smart technologies, less energy would be wasted and balancing costs would be lowered for everyone.

The Labour government is resting its hopes for cutting energy bills on reducing wholesale electricity prices. For now, wholesale costs remain the largest component of our electricity bills but their share is falling. Ministers are seeking to achieve this by building new renewable and nuclear capacity to displace gas, which currently sets the wholesale price of electricity the vast majority of the time. Whilst this is the right direction of travel, there needs to be more pragmatism about the transitional role North Sea gas will need to play in balancing the grid, while cleaner alternatives mature and come down in cost. And given the relatively high offshore wind prices agreed in the last auction round, more emphasis should be placed on securing value for money from new renewables projects through competition and more radical supply side reforms.

Other solutions for reducing wholesale prices were discussed, including scrapping the Carbon Price Support, which Claire Coutinho has championed and which the Labour government has subsequently announced. This was introduced in 2012 to top up the carbon price in the EU Emissions Trading System and drive coal off the grid. With the coal phaseout now complete, this tax can be cut, lowering the cost of gas power and therefore the cost of all non-contracted generation which is paid the marginal price.

We also discussed taking gas out of the wholesale market by creating a strategic gas reserve. This would block gas generators from bidding in the wholesale market, and instead pay them a fixed amount to generate electricity when required. There were concerns, however, this would mean more government involvement in fixing energy prices and weaker market signals for new generation.

The roundtable started the conversation about how to lower energy bills in a business-friendly way. But it also prompted several key questions for further discussion. How do we fund the reductions in taxes and levies on energy bills? How can we reconcile the imperative to cut energy prices with maintaining the direction of travel on decarbonisation and clean energy? Can the UK’s climate change legislation be reformed to deliver cheaper energy, or does it need wholesale reexamination for the next phase of the clean energy transition? And can politicians take radical steps needed to tame energy prices while not going back on previous commitments to energy companies and therefore keeping the UK an attractive place for private investment in new energy infrastructure? These are all questions that future Prosper UK roundtables will be addressing.