Why Are Energy Prices Going Up?- What Can I Do?
Energy prices are going up due to a worldwide gas supply shortage. The UK wholesale domestic energy market is scrambling to make ends meet as higher than expected energy demand and low green energy production levels have raised energy prices even more. In this guide, we explain why energy prices are going up, what this means for consumers and their electricity bills, and how it'll affect the decarbonisation of the energy market.
Why Are Energy Prices Going Up?
Energy prices are going up because there is currently a gas supply shortage across the globe that is not only affecting your gas bill but also your electricity bill. This is because a large part of the electricity generated in the UK actually comes from fossil fuels.
According to the UK energy regulator Ofgem, 38.4% of the UK’s electricity is generated from burning natural gas. Apart from this many people use gas to heat their homes, meaning that energy bills are rising across the board.
The gas supply shortage has come from several factors. The first factor pertains to COVID-19 and the lockdowns that the world experienced in 2020. During the worst of the pandemic, most businesses, factories, hotels and restaurants were closed as people stayed home.
Did you know?During the pandemic, the UK used less energy overall despite us all using more energy at home. This is because the majority of energy use in the UK comes from businesses.
This meant that there was a decreased demand for energy, which was bad news for fuel suppliers. As people used less energy, demand for fuel decreased which created an excess supply of gas. This excess supply of gas was not favourable to gas producers, as this makes the cost of gas low.
Therefore, fuel suppliers decided to slow the production of gas, until the pandemic lockdowns had eased.
Fast forward to 2021 and the gas demand is back, as the whole world is recovering. However, fuel suppliers did not expect for the market to bounce back so quickly, which meant that they were unprepared for a sudden increase in demand.
In the end, the sudden increase in demand coupled with low gas supply (due to the several months they reduced production) led to a shortage of gas supply across the entire world and made energy prices go up.
This gas supply shortage is what we are experiencing now and is the reason for high energy bills.
This map shows the breakdown of which resources are used to generate the UK's energy supply.
Why Are Green Energy Prices Going Up?
The fossil fuel industry is controlled by only a few large players, mainly oil and gas producing nations. Because of this, European gas supply reserves have reached historically low levels. The UK still imports lots of its energy from the rest of Europe, however, we do have a significant amount of renewable energy sources such as wind energy and solar energy.
However, many renewable energy sources require specific weather conditions to produce energy. In recent months the UK has had several stretches with little to no wind in major areas of wind energy production and this has deepened the energy crisis. This is an important factor because according to Ofgem, around 40% of the UK wholesale domestic energy is produced by renewable energy sources. The lack of green energy supply has also made energy prices go up.
Why Are Energy Companies Going Bust?
Energy companies are closing because they are unable to cover their costs with the money they make from your energy bills. Energy companies purchase energy from energy producers who sell it on the wholesale market.
Energy companies can offer customers lower prices if they can purchase energy at lower wholesale prices. However, as energy prices are going up many smaller energy companies are being put to the test as they are having to purchase energy at a very high price, and currently sell it to customers for lower than what they bought it for.
This is because many customers in the UK are on fixed-rate tariffs which means that the company is obligated to charge customers for energy at that price, even though the price they bought it for was more expensive.
The UK also has an energy price cap, which is the maximum price that energy companies are allowed to charge customers for energy. However, fuel prices have risen and the energy price cap has remained the same, until October 1, when it was raised by £139 per year.
This energy price rise pales in comparison with the rise in fuel prices at which energy companies are forced to buy it. Therefore, many smaller companies that have low cash reserves are unable to use their cash reserves to cover their current losses to ride the storm and as a result, are forced to close.
Will My Supplier Go Bust?
Although many UK energy suppliers are going bust, this doesn’t necessarily mean that your provider will close. Suppliers with green energy resources or who sell mostly green energy are more protected from the current energy crisis as it is independent of fossil fuel.
Likewise, larger energy suppliers like British Gas, EDF, EON, Scottish Power & SSE are also less likely to bust as they tend to have higher cash reserves on hand due to corporate oversight which allows them to outlast situations like this.
What Should I Do If My Supplier Goes Bust?
If your supplier goes bust, the best thing to do is sit tight and wait for the UK energy regulator, Ofgem, to take care of the situation for you. When an energy supplier closes, Ofgem decides which supplier will take over the customers. This usually takes less than a week.
Once the new supplier is announced, all customers will be automatically switched to the new supplier. From there, you can choose to search for a new supplier or stay with the newly appointed supplier. You will not be charged a fee to leave the newly appointed supplier. You will not lose energy supply during this process, and your energy payments will continue as usual.
It’s a good idea to enter into your online account and take screen captures of your energy balance once you hear that your supplier is going bust. This will help you in the future if the new supplier makes any errors regarding how much money you owe or are owed when your supplier closes.
Should I Switch Supplier?
If you think that your supplier may go bust, it could be a good idea to switch suppliers and change to a larger supplier that will be safer and more stable, however currently many suppliers have paused all new sign-ups as the prices are so volatile. You can always give our energy experts a call to see what offers are available and to get help answering your questions.
What Impact Will the Energy Crisis Have on Green Energy?
The decarbonisation of the energy sector has been a priority for several years now and is only now becoming a top priority due to the increased impact of global warming. The current gas supply shortage is a great reminder of how dependent we are on fossil fuels and how far we still have decarbonise to net-zero and get to a stable place where green energy can power the country on its own.
We expect that as a result of the crisis there will be a renewed interest in investing in green energy and decarbonisation as with green energy it is easier for energy suppliers to invest and become energy producers.
Producing the energy they sell will allow energy suppliers to leave the UK wholesale domestic energy market behind, achieve greater stability and control over the price, and to decarbonise which is better for everyone in the end, especially for the environment and the world's most polluted countries.
We expect that there will also be fewer energy suppliers left after the crisis which will create greater stability within the energy market as a whole and allow customers greater peace of mind that their supplier will not go bust.
Where Can I Get Help With Energy Bills?
In response to energy prices going up, the government just approved a £500 million support package to assist vulnerable families struggling to pay for energy bills due to the energy crisis. The plan is called the Household Support Fund and financial support will be distributed to vulnerable households via small grants offered from your local council.
The grant money can be used for covering the cost of daily needs including, clothing, food and energy bills. Households in England can request a Household Support Fund grant from their local council starting October 1, 2021.
If you are struggling to pay your bills because energy prices are going up, you can also contact your energy provider to see what options are available including starting a debt repayment plan. You can also contact the National Debtline which is a non-profit organisation that can help you with debt of any type.
Lastly, you can take a look at what electrical deals are currently available and consider switching tariffs. If you haven’t switched energy plans in over 1 year, then you are likely on a variable tariff which is the most expensive option as energy prices rise and fall according to the market.
Customers on variable tariffs are the most affected by the current energy price rise. Consider looking for fixed-rate tariffs to switch to, which can keep your energy prices from going up as they guarantee you the same price for the entire year which can help you reduce your bills.