Britain’s ambition to rev up its economy and tap the AI revolution faces the harsh reality that the abundant, clean and reliable electricity supply this requires is unlikely to materialise any time soon.
Prime Minister Keir Starmer has laid out several major industrial policies aimed at reviving Britain’s sluggish economy, including by pouring investment into the artificial intelligence industry, which the government says would increase productivity and create over $50 billion of gains per year.
Data centres that power AI are, however, highly energy intensive, often requiring a stand-alone source of energy to operate. Electricity demand in the UK is set to grow from 319 terawatt hours in 2024 to 450 TWh in 2035, according to grid operator NESO, with power demand from data centres expected to triple over that period.
But the government’s current plans to meet these needs by modernising and expanding the country’s ageing power system, particularly through low-carbon energy, could, paradoxically, complicate these efforts by further increasing Britain’s already lofty energy costs.
EXPENSIVE PLANS
UK domestic power prices are among the highest of any developed economy. Wholesale electricity prices rose by 40% in the first half of 2025 from a year earlier to an average of $115 per megawatt hour, largely due to increased use of gas-fired power generation amid cold weather and reduced wind output, according to the International Energy Agency.
That compares with average prices of $100 per MWh in Germany, $73 in France and $48 in the United States.
The British government says it wants to reduce energy prices by minimizing the grid’s reliance on volatile natural gas prices, boosting renewable power generation, battery storage solutions, transmission infrastructure and grid connections with neighbouring countries.
But these upfront investments will – at least initially – raise the cost of energy for consumers.
OFF COURSE
Offshore wind is the flagship of Britain’s renewable energy strategy. The government aims to boost offshore wind generation capacity to 43-50 gigawatts by the end of the decade, from around 15 GW currently.
Yet rising construction and financing costs led the government last month to increase the ceiling for the guaranteed price offered for offshore wind projects, or strike price, in this year’s auction by 11% from the previous round. That followed a 66% rise in last year’s auctionDanish wind farm developer Orsted said on Monday it plans a $9.4 billion rights issue citing adverse development in the U.S. offshore wind market
The actual strike price in the upcoming contract for difference (CfD) auction that starts this month could well be lower than the government ceiling.
Danish developer Orsted in May halted the development of the 2.4 GW Hornsea 4 offshore wind project due to rising costs.
Nuclear power is another low-carbon option the UK is exploring. The government announced on July 22 that it had secured investments to develop the Sizewell C nuclear plant in eastern England, Britain’s second new nuclear plant in as many decades, which is expected to be operational by 2030.
Nuclear power has the advantage of providing steady, low-carbon energy. But the current development cost of 38 billion pounds ($51 billion) for Sizewell is nearly double the initial estimate made earlier this decade, bumped up by inflation and higher material costs. Such cost overruns are quite common in nuclear projects.
Focusing energy policy primarily on offshore wind and nuclear thus could further increase power bills, making British industry less competitive and voters less supportive of the energy transition.
CHOICE, NO CHOICE
So does the government have any viable alternatives?
Andrew Birch, CEO of OpenSolar, argues that Britain should fully liberalise its power market. This would mean removing subsidies such as CfDs and allowing the market to determine which forms of energy can most efficiently meet consumer needs.
The idea has its merits, but given the crucial importance of energy to Britain’s economy and security, particularly amid the energy transition and AI race, the government is unlikely to be willing to give up control.
Another option would be transforming the UK’s outdated, highly centralised power system into a digital operation built around many small generators and battery storage farms. That would have the added benefit of increasing the grid’s efficiency. However, it would require billions of pounds in upfront costs.
Of course, all of the infrastructure and investments could be assessed through general taxation rather than via energy bills, reducing consumers’ sticker shock each month.
But the only thing voters hate as much as high energy prices is higher taxes, so this option is unlikely to have significant political support.
That would leave greater private-public partnerships and government debt-financed investment as possible solutions. The latter would need to be communicated clearly with markets to avoid any sustained backlash.
UK investment in renewables, nuclear, batteries and transmission – if properly planned and executed – could ultimately pay off, but given all the challenges, the major benefits likely won’t be seen for at least another decade, and this spells trouble for Britain’s power-hungry AI ambitions.
Source : Reuters
