Energy UK Explains: Are high prices being caused by energy company profits?

March 2026

What do we mean by ‘energy company’?

• The volatility of oil and gas markets in recent weeks has seen a focus on ‘energy’ in a very broad sense. The energy sector encompasses a wide range of services across production, transport and supply of both molecules and electrons.
• There is no single definition for an ‘energy company’ and businesses in the energy system can play a number of different roles.
• Various markets and types of businesses sit behind our energy bills:

Energy production

• Upstream oil and gas exploration and production
  • This is the extraction of oil and gas out of the ground. Energy UK does not represent these activities.
• Electricity generation
  • Our electricity is generated using a range of fuel types including gas, wind, solar, nuclear, tidal and biomass. We also import electricity from other countries via interconnectors.

Energy transportation

• Gas and electricity are transported across the country via a national network of pipes and wires.
• Long-distance networks are referred to as ‘transmission’, and local networks that take this gas and electricity to homes and businesses are called ‘distribution’.

Retail energy supply

• Retail energy suppliers sell electricity and gas to homes, businesses and organisations across the country. They are responsible for sending bills and dealing with customer inquiries, in addition to the delivery of government schemes that include the Warm Home Discount.

Many companies operate internationally. It is common for energy companies to be active in more than one area of the market.

What sets the price we pay for energy?

Energy bills are made up of both wholesale costs (the actual cost of the gas or electricity) and non-commodity costs (other associated costs such as operating costs, tax, and policy costs). The exact proportions vary across household and business energy bills, but for most customers around 40% of their energy bill will reflect wholesale costs, and 60% will be non-commodity costs. Wholesale costs are inherently variable and represent fuel costs, while non-commodity costs are largely fixed and set by either the Government or Ofgem.

Wholesale costs

• Gas for space heating and industrial use. Natural gas is traded within Europe and internationally, and the price is set by market factors including supply and demand.  
• Wholesale electricity price. This reflects the fuel costs underpinning electricity generation and is largely linked to the price of gas.

Non-commodity costs

• This part of the bill primarily reflects the fixed costs of infrastructure in the energy system such as network and system costs.
• It also includes policy costs, taxes, and supplier costs.

Why are energy bills increasing?

• The ongoing conflict in the Middle East, including the effective closure of the Strait of Hormuz and destruction of energy infrastructure in the Gulf, has driven increases in both oil and gas prices.
• 20% of global oil supplies and 20% of global liquid natural gas supplies pass through the Strait of Hormuz. International and regional markets for both oil and gas have seen significant price increases since the start of the conflict.

Figure 1: Gas prices for Q3 2026^[1]

• At the time of publication, gas prices for Q3 2026 had increased by 73% since the conflict began.
• These higher prices will feed through to energy bills, affecting both gas for space heating and industrial use, and the cost of electricity generation which is largely driven by gas prices.  
• This will cause household energy bills to rise in July, after the current price cap (see below) ends – although it is too early to tell by how much. It will also lead to cost increases for businesses that are on variable-rate contracts, or those with fixed-term contracts that are coming to an end. 

What mechanisms are in place to curtail energy company profits?

Companies across the energy sector – across production, transport, and supply – operate under different regulatory and market arrangements. The vast majority of the energy market is subject to either strict regulatory price controls, or standalone windfall taxes. These arrangements are designed to protect consumers from costs while ensuring the UK continues to attract the billions of pounds of private investment needed to build new energy infrastructure here, and ensure our future energy security. These arrangements include:

• The Energy Profits Levy. This tax on oil and gas production in the UK has been in place since 2022. Oil and gas extraction is subject to an effective combined tax rate of 75%.
• The Electricity Generator Levy. This tax on renewable and nuclear electricity generation in the UK has been in place since 2022. Electricity generators are subject to an additional 45% tax when the electricity price is higher than £75/MWh.
• Contracts for Difference. This revenue support mechanism for renewables provides a stable price for electricity, which is agreed through a competitive auction.  Under this system, when wholesale prices are high generators pay money back to consumers. When they are low, the scheme provides support to maintain investment. This mechanism helped prevent big price increases; during the last gas price spike, electricity generators paid back £1.2bn to consumers.^[2]
• Network Price Controls. Both electricity and gas networks are regulated through long-term price controls. The costs of investment underpinning this are agreed before the start of the five-year price control period, based on a decision by Ofgem.
• The Energy Price Cap. The price cap is set by Ofgem, and limits what energy suppliers can charge for the supply of electricity and gas to homes. Suppliers are allowed to make a maximum of 2.5% profit per account, meaning that for the current [Jan 2026] cap of over £1,700, suppliers can make a maximum of £30 in profit. However, in reality very few make close to that. Learn more about what makes up an energy bill.

For more information, please email MPSupport@energy-uk.org.uk.

[1] Source: UK NBP Natural Gas Futures Pricing

[2] CfD Historical Data – Low Carbon Contracts