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Why are energy prices increasing so much?

Why are energy prices increasing so much?
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Energy prices are surging across the UK, just as demand for gas and electricity is set to grow as we move into the colder months.

So what’s behind the rise in energy prices? And should you worry about your bills this winter? Let’s take a look.

How much have energy prices risen by?

Retail energy prices are rising as a result of a steep hike in the cost of wholesale energy.

According to the oil and gas industry trade body, Oil & Gas UK, wholesale gas prices have surged by 250% since the beginning of the year. And prices have increased a whopping 70% since August.

What is behind the rise in wholesale prices?

A number of factors have contributed to the spike in wholesale energy prices.

Firstly, the winter of 2020 was colder than average, meaning that current energy stocks are lower than usual, placing upward pressure on the cost of energy.

Another factor behind rising energy prices has been the excessive global demand for liquefied natural gas.

The UK’s heavy reliance on renewable energy is a further factor contributing to higher energy prices. That’s because 2021 has seen lower winds than normal, meaning that wind turbines have been unable to generate as much power as they have done in previous years.

How has the rise in energy prices impacted the economy?

Over 22 million UK households rely on gas for energy. This means the rise in wholesale energy prices has a direct impact on many of us.

Furthermore, a number of energy suppliers have gone out of business over the past month, pushing many households onto more expensive energy tariffs provided by alternative suppliers. A reduction in the number of providers will lead to lower competition in the retail energy market, which may lead to further price rises.

Yet it’s not just household energy bills that are impacted by rising energy prices. Rising gas prices are also impacting food costs. Such rises have forced a number of fertiliser producers to cease production, leading to a shortage of carbon dioxide, which is used to keep food fresh. This is already placing upward pressure on the cost of food.

Will my energy bills increase during the winter?

Regulator Ofgem sets an energy price cap that limits the maximum energy prices suppliers can charge. The cap will increase on 1 October, meaning that many households will face price increases of up to £139 a year.

Yet, as a result of rising wholesale energy prices, suppliers believe that the price cap is too low. That’s because the cap effectively restricts suppliers from being able to pass on wholesale price rises to consumers.

With the next price cap review not due until February 2022, many suppliers feel that without Ofgem intervention, they will be unable to stay in business.

Peter McGirr, chief executive of Green Energy, recently told the BBC that his company may go bust without government intervention. He explained: “Without any support mechanism being put in place by government, it’s unlikely we will see the winter through.”

Will the government step in to help with energy prices?

According to reports, the government is currently considering offering emergency state-backed loans to some energy companies in order to help them take on customers from failing firms.

Whether the government will choose to go further and offer more support to households struggling with high energy prices, remains to be seen.

Are you worried about your energy bills? Read our recent article on how Ofgem’s new energy price cap will impact your wallet. And for practical energy-saving tips, see our article that explains how to keep your energy costs down.

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