What's happening to Energy prices?

It's impossible to escape talk of gas and electricity prices in the UK and projections for the prices in October 2022 and January 2023 when the price caps are reviewed are frightening. Our Rail|Power|Infrastructure Director Gareth Arnold looks into the energy prices market and shares his insights.

Through various conversations and across social media, it seems the most unfathomable question being asked is why are energy prices rising? In short, why are our utility bills going up? 

The short answer is, the cost of importing gas has increased, with iNews stating that gas prices on global markets ‘have surged as much as sixfold’. This has happened as countries around the world kick-started their economies, trying to return to normality through the Covid-19 pandemic. It is also reported that following a particularly long winter, countries in Asia and Europe used a massive amount of gas stocks, causing a hike in the price, which could be perceived as opportunist and exploitive on the suppliers’ part.

Of course, the horrendous attack on Ukraine has led to the price of Russian gas becoming exorbitant. Whilst the UK bought little gas directly from Russia, our suppliers do, which has unfortunately seen the cost passed down the supply chain. Worryingly, this situation could actually worsen, if Russia further disrupts gas supplies.

The price that we pay for electricity and gas is clearly precarious and susceptible to political events, but the cost of transmission and distribution, actually delivering energy, has also gone up. We have to look back at Autumn 2021, when it was telling that so many energy retailers were unprepared for these rising costs and the demand. As such, as pointed out by Economics Observatory, many were relying on short-term markets and had to pay much more than Ofgem assumed when it was setting the price cap. It could be said that this was like trying to do your typical full weekly shop in a local convenience store; the demand can be met, but at a price. The ultimate warning sign came to fruition, when a number of companies, with millions of customers, became bankrupt as they did not have the financial reserves to cover the losses from selling energy (to the consumer) for less than it had cost them to buy.

Our Government will have to intervene and ensure that energy providers don’t exploit the customer, but of course, these companies have to make money or the entire system collapses. Environmental concerns and commitments demand that we produce more green, sustainable energy and that should be the immediate goal, but as the cost of living mounts, it has to be commercially viable for everyone. In the meantime, it should be noted that this is written in the warmth of Summer; we can only hope that wholesale prices return to a fair level before Winter.