How conflict-related elevated energy costs can impact consumers’ bills

Wholesale power

The clear and most obvious immediate impact on power prices is on the commodity (or “wholesale”) element of the power bill. The impact on customers will depend on their hedging strategy. Those that who have procured most of their power needs on a forward basis may feel little impact, depending on the duration of the conflict and the level of elevated prices. Those with a substantial exposure in the short-term are likely to feel a more significant impact. Those procuring on a day-ahead (DA) basis will already be feeling the impact of higher power prices.

Consumers who have fixed their energy contracts won’t see an increase until the end of their fixed term contract, and only then if the conflict is continuing to influence prices.

Contracts for Difference

The costs of the Contracts for Difference (CfD) scheme are inversely impacted by wholesale power prices. Assets supported under the scheme are awarded a strike price, setting a support level over the lifetime of the agreement. When the market price falls below this level, the assets receive subsidy support. But, when the market price climbs above this level, the asset owners must pay the difference back.

Elevated power prices have the potential to lower scheme costs and even drive them negative. For example, an offshore wind asset with a strike price of £79.95/MWh would have been receiving top-up support in the week commencing 23 February 2026. DA prices in the week were between £69.30/MWh and 77.50/MWh. However, with DA prices exceeding £97.75/MWh, the first week of March 2026 will see the asset owner paying back under the terms of its CfD. As power prices climb higher, a greater proportion of assets will pay back rather than receive support.

Balancing costs

The costs of input fuels are factored into the bid and offer prices that fuelled assets provide in the Balancing Mechanism (BM), where they offer to increase or decrease generation. These higher costs will also be factored into bid prices for fuelled assets in ancillary service schemes. Both the costs of the BM and ancillary services costs are recovered by the Balancing Services Use of System (BSUoS) charge, which could therefore increase over time.

Inflationary impact

Energy prices influence inflation directly and have an impact on a range of items within the baskets of consumer goods used to measure inflation. This is because energy is an essential input to many goods and services. The majority of third party costs (TPCs) on the power bill have elements that are indexed to inflation, specifically the Consumer Price Index (CPI) measure of inflation. This includes renewable support schemes (including the Renewables Obligation and Feed-In Tariff from April 2026), as well as network costs. Only one charge is indexed to the typically higher rates of the Retail Prices Index (RPI) – the Climate Change Levy. Higher inflation will influence a greater annual increase to many of these charges.

At Drax Energy Solutions, we support customers with managing their risk profile, accessing Corporate Power Purchase Agreements (CPPAs), and executing their trading strategies. And we now have a new summary available – our Market Scenarios: the Role of Hedging report - in addition to our regular update on the energy market, the ‘Electricity Prices Explained’ (EPE) guide. The Spring 2026 edition will be published on 26 March for customers and partners. A condensed summary of our expectations for 2026-27 will be issued to the wider market.

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