In a week that has seen the announcement of major price rises for UK households and the launch of the government white paper on electricity market reform (EMR) – with a horizon to 2030 – it is worth considering what the prospects are for energy prices in the UK.

In the latter half of 2010 the UK had the lowest household gas prices in the EU-15, thanks to the UK having the most competitive wholesale gas market in Europe. On electricity, the UK was in a less favourable position, with pre-tax prices around the average for the EU-15, partly as a result of the continuation of cross-subsidies towards households in other European countries. However, including consumer taxes on electricity, the UK had the fourth lowest electricity prices in the EU-15.

A number of factors will be key to the future evolution of individual household bills. First, international commodity prices for gas. Here the supply-and-demand balance globally is subject to large uncertainty due to the discovery of new sources supply (ie shale gas). Gas is predicted to get somewhat more expensive to 2030, but there is a significant possibility that it might be cheaper in real terms than now.

Second, additional support costs for renewables, demand reduction and low-carbon generation. Total policy support costs are envisaged to be a higher share of the electricity bill in 2030 than now. Given the problems of actually delivering renewable and nuclear investment on budget, there would seem to be a strong risk that households will pay more than currently envisaged, if the planned levels of investment are achieved.

Third, competition in the retail and generation market. Since privatisation, the UK has developed competitive wholesale and retail energy markets which have put pressure on companies to keep costs down and passed these reductions on to consumers. Government focus on facilitating particular investments rather than on outcomes for consumers seems almost certain to reduce competitive pressures on companies relative to now.

Fourth, the exploitation of demand reduction potential. A major assumption in the EMR is that household electricity demand will fall by 10% to 2030. This cuts the headline impact on the household bill. We all hope this will be true on average, but there will be substantial variance across households in their ability to meet the average and there will be significant household investment necessary to achieve this.

Fifth, taxation of energy. Currently, VAT on household electricity and gas is only 5% and household energy taxation is low. The future will see higher taxation via the introduction of the carbon price support and government auctioning of EU carbon allowances. Any move towards electrification of transportation would make higher taxes on household energy more likely to make up for the loss of tax revenue from liquid fuels.

Putting these drivers together, it is clear that future energy bills are substantially in the hands of the government. Assuming international commodity prices do not fall, energy subsidies and energy taxation and the moderation of competition will push household bills up. Households will react as best they can by reducing energy demand. Richer households will have more scope to do this and to exploit subsidies (ie installing solar panels) to household energy production.

Politics will intervene if household bills rise substantially. Fuel tax protests and recent pressure to reduce fuel duty set uncomfortable precedents for policy-inspired energy price rises (particularly those clearly labelled as tax rises). There will be pressure to raise winter fuel payments and increase cross subsidies to fuel poor households. In this case, it will be the "squeezed middle" that will see the largest negative impact on their real incomes.