It’s no secret that energy prices have increased in recent months. It started with rising gas costs as wholesale prices increased by up to 140% last autumn. Now, electricity prices are following the same trend as energy costs look set to skyrocket in 2022, but just how high can we expect bills to go?
Why are energy prices rising?
Energy suppliers buy gas and electricity upfront and recover their costs by selling them on to consumers. This forward buying process is called hedging and means providers and consumers are less at the mercy of market volatility. It also allows suppliers to offer fixed-rate energy deals that give consumers a level of security. The downside is that if wholesale prices fall, bill payers don’t enjoy any immediate savings.
Recently, these wholesale energy prices have increased. Part of this is down to growing global demand as countries start to increase their outputs after the pandemic. Colder weather in some parts of the world has also exacerbated demand.
Another big reason currently being debated is whether or not gas producers are meeting their obligations or whether too little gas was ordered in the first place. The UK is also a net gas importer, which means it buys in more gas than it produces. As a result, whatever’s happening to gas prices on the international stage affects us too.
How do wholesale energy prices affect energy bills?
Industry regular Ofgem looks at wholesale prices and uses this data to set the energy price cap. The cap is set twice a year and essentially limits the amount of money your energy supplier can charge you for each unit of gas and electricity you use (measured in kilowatt-hours). The next review is due imminently, with the new price cap starting in April 2022.
Remember that the cap doesn’t limit your bills – these will continue to rise and fall according to your energy use. The cap just ensures that what you pay for energy represents the cost of supplying it. Also, bear in mind that the energy price cap only applies to standard default tariffs and can vary depending on how you pay your bills.
How much will energy prices rise by?
According to a recent briefing for the House of Commons, the current energy price cap (£1,277) could increase by up to £400. But that rise only takes into account the wholesale energy prices.
As well as wholesale energy prices, bills also factor in all sorts of other costs. For example, the cost of supplying energy to our homes and environmental taxes.
Another big expense is operating costs. And thanks to the collapse of numerous energy companies, operating costs for the remaining suppliers have increased and are likely to continue rising as and when more firms collapse. In fact, that figure could add at least £100 to the energy price cap.
But that figure could just be the start, and it could double, according to the chief executive at energy company Centrica. This could potentially mean the total price cap rises by around £600, taking average annual energy bills to nearly £2,000.
What’s being done about rising energy prices?
As yet, there are no concrete solutions, but there are lots of suggestions. Ideas include a reduction in VAT on energy bills, expanding the Warm Homes Discount and temporarily increasing Universal Credit. Other suggestions include allowing vulnerable customers to defer payments, removing environmental taxes and making North Sea oil and gas companies pay a one-off ‘windfall’ tax to offset energy bills.
