Why does UK electricity consumption keep declining?

and what does this mean for the future?

There’s been a lot of talk in recent years about how electricity is going to expand as we move towards net-zero energy objectives. However, the reality is that UK electricity consumption has been declining - in fact, it has veritably crashed over the best part of the last twenty years. So why has this been happening, and what does this mean for the future?

We can see the decline of UK electricity consumption since 2005 in the graph below:

Source: Digest of United Kingdom Energy Statistics

As you can see electricity consumption increased very rapidly in the 1950s so that by the beginning of the 1970s it was over four times larger than what it had been in 1951. Indeed, even twenty years ago it was assumed by policymakers that this general trend of escalating electricity consumption would continue (note, in the UK at least electricity consumption and electricity production figures have been more-or-less interchangeable in scale).

The oil crises of 1973 and 1979 led to energy price increases, and this was associated with a pause in the rise of electricity consumption for around a decade. Nevertheless, energy prices fell later on in the 1980s and electricity production/consumption rose again.

The 2006 Energy Review (see here), for example, projected that UK electricity production would expand by over 11 per-cent between 2005 and 2020. In fact, by 2023, compared to 2005 electricity production had declined by around 26 per-cent - a whopping difference in outcomes. The predicted rapid expansion of electricity production was, of course, a narrative that underpinned the alleged need to expand nuclear power which was a crucial feature of the 2006 Report. But given that electricity consumption had increased up until around 2005, we should ask why there has been such a decline since.

The period after 1951 was one of continuing industrialisation whereby there was an expansion of production of consumable products requiring greater electricity generation and where many of the products themselves - fridges, TVs, washing machines, more lighting, used larger amounts of electricity. There have been key structural changes in the economy since the 1960s, in that a lot of demand for these products has been saturated to the extent that once everybody has a fridge, there is a slowdown in the number of new fridges demanded towards replacement levels.

The economy has grown (to the extent that it has still been growing) towards consumption of services rather than industrial production, and services are generally less energy-intensive than industry. This is a factor which reduces the tendency towards expansion of electricity demand. Also, energy efficiency practices and standards have been implemented in the various sectors of the economy - but of course much of this is in response, either directly or indirectly, to increases in energy prices. This leads onto another crucial downward pressure on electricity consumption, that is the increasing price of electricity over the last 20 years or so.

Source: drawn from data series associated with Digest of United Kingdom Energy Statistics. The data in the charts are taken from Government indices of consumer energy prices. They reflect the 'total cost' to consumers. See the series published HERE

Indeed, as can be seen from the chart, in the period since 1990 there seems to be a close inverse association between energy price increases and decreases and increases/decreases in electricity consumption. Please note that the energy prices in the chart are indices which means we can compare the real price levels at different time eg in 2022/3 electricity prices were triple, in real terms (much more so in nominal prices) what they were in at the beginning of the century.

Source: drawn from data series associated with Digest of United Kingdom Energy Statistics and Department of Energy (note: 2010 = 100)

Lest you think that somehow the increasing electricity prices had very much to do with the cost of generating electricity, please think again after looking at the chart above which compares UK electricity and gas prices. You can see that the rises (and less often ) falls of electricity and gas prices seem closely related, and there is a good reason for that! That is because gas fired power plant have been the ‘marginal price’ setter for most of this period. So as gas prices rise or fall, so do electricity prices. It is fashionable for the political right to blame energy price rises on renewable energy, but then this does not fit the data as shown here. Gas prices are not driven in any way by renewable energy prices - but the effect of recent increases is entirely to do with gas prices driving electricity prices.

The increase in UK energy prices since 2005 has had a substantial (downward) impact not only on electricity consumption (and energy consumption in general), but may also have reduced economic growth a lot - and economic growth has been hit also by the effects of the post-2008 recession. According to academic research (see here based on international comparisons) every 10 per cent increase in energy prices is associated with a 0.15 per cent decline in economic growth.

Hence one can explain the reasons for the substantial decline in UK electricity consumption over the last two decades by reference to higher electricity prices, lower economic growth, and also (by comparison with earlier decades) a shift to a less intensive, more service-based economy. I should say here that it is major increases in energy prices that reduce economic growth, rather than high energy prices per se. Countries like Japan have had, historically, very high energy prices compared to the UK. Eventually, business gets used to high energy prices. However Japanese industry long got used to that position. Indeed it was only after world energy prices fell, especially after 1990, that the Japanese economy stagnated (for reasons that it is not relevant to discuss here).

So what of future prospects for electricity consumption in the UK? If, as I would hope, the UK economy returns to having a reasonable level of economic development electricity consumption may stabilise rather than fall, all other things being equal. Indeed electricity demand will probably increase a little from its present level because there is the start of a shift towards electrification of transport and heating. However, this is likely to have relatively little effect for the next few years. This is because use of fossil fuels in transport and heating will still overwhelmingly predominate. That, in turn, is given the slow progress towards uptake of electric vehicles and heat pumps in the UK, and the lack of UK Government pressure for electrification in general.

Increasing prices has got a lot to do with falling electricity consumption, for sure. But as the charts I reproduce imply that's mainly connected with increasing natural gas prices. But as international LNG prices go down (with supply gluts) in the 2026-2028 period (eg see HERE for a discussion by Seb Kennedy), electricity prices will go down. As these waters recede we should be able to realise that renewables provide us with consistency of energy prices.

Renewables can bring energy security

A further lesson from this story is that the key to providing an energy supply with economic security is to provide price stability. The tendency of fossil fuels to have energy price spikes provides only insecurity and destroys stable economic conditions. Renewable energy in association with reliable long-term contracting from Government is a combination that can provide energy security.

Wind and solar prices can be made stable through the issue of contracts for difference - CfDs - as has been the recent practice in the UK. Hence prices of renewable energy installed in the UK do not need to vary with international swings in fuel prices. Electricity consumption needs growth in the future as transport and heat are electrified. However, energy efficiency can keep growth in electricity consumption down to a level whereby development of new renewable energy sources can be planned and managed effectively.