Context: the crisis has passed, but the pain remains
The energy price shock of 2021-2023 was the worst cost-of-living crisis in a generation. Wholesale gas prices surged from 50p per therm in early 2021 to a peak of £6.50 in August 2022, driven by post-pandemic demand, low European gas storage, and Russia's invasion of Ukraine. The energy price cap, which sets maximum rates for households on default tariffs, rose from £1,138 in October 2021 to £4,279 in January 2023—a near-quadrupling in 15 months. Millions of households faced impossible choices between heating and eating, and the government spent £40 billion on the Energy Price Guarantee to cap bills below the Ofgem level for two winters.
By January 2026, the acute crisis is over. Wholesale gas prices have fallen to 80-100p per therm, close to pre-crisis levels. The price cap has dropped to £1,738 for January-March 2026, down 60% from the peak. Government support has ended, and the market has stabilised. But for households, the relief is limited. Bills remain 45% higher than in October 2021, and analysts expect them to stay elevated indefinitely. The question is why: if wholesale prices have normalised, why haven't bills?
The answer lies in the structure of energy bills. Wholesale costs are only one component, and while they have fallen, other costs—network charges, policy levies, supplier operating costs—have risen sharply. The energy system is fundamentally more expensive than it was in 2021, due to investment in renewables, grid upgrades for net zero, stricter supplier regulation, and a global gas market that is structurally more volatile. Understanding these changes is essential for households trying to manage energy costs in 2026 and beyond.
The data: anatomy of the £1,738 price cap
The energy price cap for January-March 2026 is £1,738 per year for a typical dual-fuel household paying by direct debit. This is based on assumed consumption of 11,500 kWh of gas and 2,700 kWh of electricity—roughly the average for a three-bedroom home with three to four occupants. The cap sets maximum unit rates and standing charges, which vary by region and payment method, but the typical bill breaks down as follows:
| Component | Cost per year | % of bill |
|---|---|---|
| Wholesale energy costs | £700 | 40% |
| Network costs (transmission & distribution) | £435 | 25% |
| Policy & environmental levies | £260 | 15% |
| Supplier operating costs | £175 | 10% |
| VAT (5%) | £85 | 5% |
| Supplier profit margin | £85 | 5% |
| Total | £1,738 | 100% |
Compare this to October 2021, when the cap was £1,138:
| Component | Cost per year (Oct 2021) | % of bill |
|---|---|---|
| Wholesale energy costs | £570 | 50% |
| Network costs | £230 | 20% |
| Policy & environmental levies | £170 | 15% |
| Supplier operating costs | £80 | 7% |
| VAT (5%) | £55 | 5% |
| Supplier profit margin | £35 | 3% |
| Total | £1,138 | 100% |
The wholesale cost has increased by £130 (23%), but network costs have nearly doubled (+£205), policy costs are up 53% (+£90), and supplier costs have more than doubled (+£95). These non-wholesale increases account for the majority of the £600 gap between the 2026 cap and the 2021 cap.
What's changing: why bills can't return to 2021 levels
Network costs: the price of net zero
Network costs—the charges for transporting electricity and gas from power stations and import terminals to homes—have risen sharply and will continue to rise. National Grid, which owns the high-voltage electricity transmission network and the gas transmission network, is investing over £100 billion between 2023 and 2035 to upgrade infrastructure for net zero. This includes new cables to connect offshore wind farms, reinforcement of the grid to handle variable renewable generation, and replacement of ageing gas pipes.
These costs are recovered through network charges, which are passed to consumers via energy bills. Ofgem's RIIO-2 price control, which sets allowed revenues for network companies for 2021-2026, permits higher charges to fund this investment. The typical household's network charge has risen from £230 per year in 2021 to £435 in 2026, and Ofgem projects it will reach £500-550 by 2030.
The increase is necessary—without grid upgrades, the UK cannot connect new renewables or meet net zero targets—but it is a structural cost increase that cannot be reversed. Even if wholesale prices fall further, network costs will keep rising, putting a floor under bills.
Policy and environmental levies: the cost of subsidies
Policy costs include subsidies for renewable energy, energy efficiency schemes, and support for vulnerable households. The main levies are:
- Renewables Obligation (RO): subsidies for older wind and solar farms built before 2017, costing around £60 per household per year. The RO closes to new projects but existing obligations run until 2037.
- Feed-in Tariff (FiT): payments for small-scale solar panels, costing around £20 per household per year, running until 2039.
- Contracts for Difference (CfD): subsidies for new renewables and nuclear, costing around £40 per household per year. This varies with wholesale prices—when prices are high, CfD generators pay money back; when prices are low, they receive subsidies.
- Energy Company Obligation (ECO): funding for insulation and boiler upgrades for low-income households, costing around £50 per household per year.
- Warm Home Discount: £140 rebate for vulnerable households, funded by a levy on all bills, costing around £15 per household per year.
- Sizewell C RAB charge: from 2026, a levy to fund construction of Sizewell C nuclear plant, starting at £15-20 per household per year and rising to £40-50 by 2030.
Total policy costs are £200-250 per household per year in 2026, up from £170 in 2021. The increase is driven by the Sizewell C RAB charge and higher ECO spending. These costs are politically determined and could be reduced by cutting subsidies, but doing so would slow the transition to renewables and net zero.
Supplier costs: the legacy of the collapse crisis
Supplier operating costs have risen sharply since 2021, driven by stricter regulation after the 2021-22 supplier collapse crisis. Between September 2021 and December 2022, 31 energy suppliers went bust, affecting 4 million customers, because they had not hedged against rising wholesale prices and could not cover their costs under the price cap. The collapses cost consumers an estimated £2.7 billion in Supplier of Last Resort (SOLR) costs, as surviving suppliers took on customers at a loss.
Ofgem responded by tightening capital requirements, forcing suppliers to hold more cash reserves and hedge more of their wholesale exposure. This makes the market more stable but increases costs, which are passed to consumers. Supplier operating costs in the price cap have risen from £80 per household in 2021 to £175 in 2026, reflecting higher capital costs, hedging costs, and bad debt provisions (as more households struggle to pay bills).
The profit margin allowed in the price cap has also increased, from £35 per household (3% of the bill) in 2021 to £85 (5%) in 2026, to ensure suppliers can remain viable and attract investment. This is controversial—critics argue consumers are subsidising supplier profits—but Ofgem maintains it is necessary to prevent further collapses.
What it means: adapting to a higher cost base
The uncomfortable truth is that energy bills are unlikely to return to pre-2021 levels. Wholesale gas prices may fall further, but network costs, policy levies and supplier costs are structural and rising. Analysts expect the price cap to stabilise at £1,600-1,800 through 2026-2027, meaning typical annual bills of £1,600-1,800 compared to £1,100-1,200 in 2019-2021.
This has profound implications for household finances. Energy is now a significantly larger share of household budgets, particularly for low-income households who spend a higher proportion of income on energy. The Joseph Rowntree Foundation estimates that the poorest 10% of households spend 10-12% of income on energy in 2026, up from 6-8% in 2021, pushing millions into fuel poverty.
For most households, the only way to reduce bills is to reduce consumption. Energy efficiency measures—insulation, draught-proofing, efficient appliances, smart thermostats—can cut usage by 10-30%, translating directly to lower bills. The government's ECO scheme provides grants for insulation and boiler upgrades for low-income households, but it is heavily oversubscribed and many households fall through the gaps.
Fixed-rate tariffs offer an alternative to the price cap, providing certainty against future cap rises. In early 2026, some fixed deals are priced at or slightly below the cap, making them attractive for risk-averse households. But fixes lock you in for 12-24 months, often with exit fees, so they are not suitable for everyone.
What to watch next
Watch Ofgem's quarterly price cap announcements, made roughly six weeks before each new cap period. The next announcement is due in late February 2026 for the April-June quarter. If wholesale prices remain stable, the cap may fall slightly to £1,650-1,700, but further significant drops are unlikely unless there is a major shift in the gas market.
Watch network cost projections in Ofgem's RIIO-3 price control, due to be finalised in late 2026 for the 2026-2031 period. This will set the trajectory for network charges and determine how much of National Grid's £100 billion investment is passed to consumers.
Watch the government's approach to policy levies. There is growing political pressure to remove some levies from bills and fund them through general taxation instead, which would reduce bills but shift costs to taxpayers. The Treasury has resisted this, but if bills remain high and fuel poverty worsens, it may reconsider.
And watch your own consumption. In a world of permanently higher energy costs, the households that thrive are those that use less. Energy efficiency is no longer a nice-to-have; it is a financial necessity. The energy crisis may be over, but the high-cost era has only just begun.
Frequently asked questions
If wholesale gas prices are back to normal, why aren't bills?
Wholesale costs are only part of the bill—around 40% in 2026, down from 50% in 2021. The rest is network charges (25%), policy and environmental levies (15%), supplier operating costs (10%), VAT (5%) and profit margin (5%). Network costs have risen sharply as National Grid invests in upgrades for renewables. Policy costs have increased due to new levies for nuclear (Sizewell C RAB charge) and energy efficiency schemes. Supplier costs are higher due to stricter capital requirements after the 2021-22 supplier collapse crisis. These structural increases mean bills cannot return to pre-crisis levels even if wholesale prices do.
What are the policy and environmental levies on my bill?
Policy costs include: Renewables Obligation (subsidies for older wind and solar farms, ~£60/year), Feed-in Tariff (small-scale solar, ~£20/year), Contracts for Difference (subsidies for new renewables and nuclear, ~£40/year), Energy Company Obligation (funding for insulation and boiler upgrades, ~£50/year), Warm Home Discount (support for vulnerable households, ~£15/year), and from 2026 the Sizewell C RAB charge (nuclear construction levy, ~£15-20/year rising to £40-50 by 2030). Total policy costs are £200-250 per household per year, or roughly 12-15% of the average bill.
Will bills ever go back to pre-2021 levels?
Almost certainly not. The energy system has fundamentally changed: more expensive network infrastructure for renewables, higher policy costs for net zero, stricter supplier regulation, and a global gas market that is structurally more volatile and expensive than pre-2020. Analysts expect the price cap to stabilise at £1,600-1,800, meaning typical annual bills of £1,600-1,800 compared to £1,100-1,200 in 2019-2021. Households need to treat higher energy costs as permanent and prioritise energy efficiency to reduce consumption.