Why are energy prices going up?

It's been hard to escape the news of energy price hikes. But why are energy prices going up and when might they come down again?

Mother using a phone with her daughter while having breakfast and calculating energy bills
(Image credit: Getty images)

Wondering why are energy prices going up? You're not alone. Energy prices have skyrocketed since the increased energy price cap (opens in new tab) came into effect in April. This raised energy bills for millions by an average 54%. A further steep increase is predicted when Ofgem announces the new energy price cap (opens in new tab) later in the summer

Dr Craig Lowrey (opens in new tab), Principle Consultant at Cornwall Insight (opens in new tab) said: “While the government has already offered some support for consumers to pay their energy bills this year this was before forecasts began predicting further rises and over a longer period. It is possible the government could take further action in the Autumn, but we have no guarantees that further support will be forthcoming.”

You might be tempted to fix your energy prices (opens in new tab) now in order to avoid further price hikes.  But while everyone is feeling the pinch and worrying over how much their energy bills will cost (opens in new tab), it may not be obvious why fuel bills are rising.

Why are energy prices going up?

The reasons why energy prices are going up are complex. They mostly relate to the soaring price of wholesale gas in Europe during 2021 - this is the gas that home suppliers buy and then sell to you. Wholesale gas prices have been affected by a number of factors. These include a mismatch between supply and demand as the world bounces back from the pandemic, storage issues, and the weather. War in Ukraine is a further issue.

Demand

Gas prices soared when the world started to get back to normal after Covid-19 lockdowns. As countries around the world began to open up, demand for gas increased from the low-level gas consumption we saw when most businesses were closed and international travel was virtually banned.

Storage

How we store gas in the UK has added to the problems too. The use of gas stores can act as a buffer against rising prices by allowing countries to buy in bulk in periods of low demand and storing it for later use. 

But the UK has very little in terms of gas storage capacity, after the 2017 decision to close the Rough facility in the North Sea that had provided 70% of the UK's storage capacity for more than 30 years.

This prevents the UK from being able to buy gas in bulk during the summer months, when demand is lower, and storing it to use in the winter when demand increases.

This has not previously been an issue and the UK has relied on a combination of domestic gas sourced from the North Sea, imports from Europe and liquified natural gas from the Middle East to meet demand. But we're now having to pay a much higher price for it. 

Stephen Murray (opens in new tab), energy expert at MoneySuperMarket, explains: “Gas storage levels were at record lows in the UK and across Europe, while demand for gas (also a major fuel for electricity generation) rose significantly across the world, most notably in China. Supply could not keep pace with demand, with the inevitable rise in prices.” - 

War in Ukraine

The geo-political issues that we are seeing in Ukraine have caused huge uncertainty in world commodity markets, especially gas and oil. While only around 5% of the gas we use in the UK comes from Russia, this figure is around 40% for Europe's energy supply. 

If European countries receive less gas from Russia, they need to source it from elsewhere. This, in turn, impacts the gas supplies for other countries and drives the price up.

The weather

The weather hasn’t helped energy prices either. Europe had a cold winter in 2020/21 and a less windy and less sunny summer than normal. This means renewable sources like wind and solar produced less power. These adverse weather conditions also caused food prices to go up (opens in new tab)

 

How much could energy bills go up by?

April saw Ofgem’s energy price cap rise from £1,277 to £1,971 a year. Although stated as a typical annual cost, the energy price cap is actually a limit on how much suppliers are allowed to charge per unit of energy. The maximum rates are now 7p per kilowatt hour for gas and 28p per kWH for electricity. Your bill may be more or less than the price cap depending on how many units of energy you use.

There is more bad news on the way, with another increase in the energy price cap due in October. Ofgem has yet to reveal the details, but latest predictions sit at around 65%. As oil companies report record profits, the incoming price cap increase has led to frustration, with trade unions setting up the Enough is Enough campaign (opens in new tab) to fight the cost of living crisis. 

The price cap only applies to households on their supplier’s default or standard variable tariff. It doesn’t affect people on fixed tariffs. If you’re on a fixed tariff, you won’t see your bill go up until the fixed period ends. At this point, you’ll be moved on to your supplier’s standard tariff unless you opt for a new fixed rate.

To see how your energy bills will be affected by another significant energy cap hike in October, use our calculator. 

Why have energy suppliers gone bust?

About 30 energy suppliers have gone bust since last summer. These include some big names including Bulb, Avro, Orbit and Pure Planet. Energy firms are struggling to survive because the price cap prevents them from passing on the full cost of gas to their end consumers. In short, they are paying more for gas than their customers. They're running at a loss even before the costs of trading are taken into account.

Mark Bennett (opens in new tab), head of energy at energyhelpline.com, says: “The important news for households is that if your energy company does go bust, your lights and heating won’t suddenly turn off, in addition, any credit you have established on your account is protected. So, sit tight, and wait for your newly appointed supplier to get in touch.”

When will energy prices come back down?

It is currently unknown whether energy prices will drop as we move into 2023. Up until the conflict between Russia and Ukraine escalated, most experts predicted energy bills would start to fall in 2023. But, unfortunately, the Russian invasion changes things. Bills will almost certainly go up again in 2022, with the energy price cap set to increase again from October.

Energy expert Stephen Murray says: “A significant proportion of gas for Western Europe comes from Russia and across pipelines through Ukraine and Belarus. A new pipeline NordStream 2 into Germany, was due to support gas supplies but this has been embroiled in legal and political challenges, resulting in the opening of this pipeline being suspended.

“So, whilst uncertainty over supply remains, UK energy prices and consumer bills look set for a period of unprecedented levels”

You may pay more (or less) for your energy than the price cap depending on how much energy you use. So, the key to keeping your bill down is to use less energy. Although involving an initial cash outlay, installing an energy-efficient boiler and insulating your home will significantly reduce the amount of energy you use. 

If you don’t have the money to spend upfront, small changes such as turning down your thermostat, not leaving appliances on standby, and switching to LED lightbulbs can cut your bill too.

You can normally protect yourself from energy price hikes by opting for a fixed tariff – but right now, this would be a gamble. If you come across a fixed deal, it's likely to be significantly more than the current cap. But, it could be a way to beat the price hikes in October. It'll mean you pay more between now and October, in the hopes of saving, or at least breaking even by the time the cap changes again in April 2023. Do your sums before you commit, but be aware that while predictions are rife, we don't get know for certain how much the energy price cap will rise in October. 

Emma Lunn
Emma Lunn

Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years of experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror.

With contributions from