Why are energy bills increasing?

Squeeze on wholesale gas prices around the world driving up household bills

The UK’s energy price cap, the maximum amount a utility company can charge an average customer per year for the amount of electricity and gas they use, has been reviewed again and risen by a shocking 80 per cent, meaning a steep rise in household bills this winter.

Ofgem, Britain’s energy industry regulator, has announced that the cap will rise from £1,1971 to £3,549 from 1 October 2022 for a household on average usage. That means a £1,578 per year increase for the average customer.

The country’s 4.5 million pre-payment meter customers, who are often the most vulnerable and already in fuel poverty, will meanwhile see their average annual bill rise to £3,608.

Adam Scorer, chief executive of fuel poverty charity National Energy Action, said: “The scale of harm caused by these price rises needs to sink in. A warm home this winter will be a pipedream for millions as they are priced out of a decent and healthy quality of life.

“Households need money in their pockets to weather this storm or we are going to see millions in dangerously cold homes, suffering in misery with unimaginable debt and ill health.

“Action is needed now to prevent the bleakest of winters.”

Simon Francis, co-ordinator of the End Fuel Poverty Coalition, said: “Today’s Ofgem price hike is like a dagger to the heart of millions of people up and down the country.”

Subsequent industry forecasts have predicted even steeper rises in the cap for future quarters, with Cornwall Insight analysts warning it could increase again to £4,200 on 24 November and then to £5,300 or higher in the new year, a situation that may prove untenable.

Auxilione, another energy sector consultancy, thinks the cap will reach £6,823 by April 2023.

Cost of living: How to get help

The cost of living crisis has touched every corner of the UK, pushing families to the brink with rising food and fuel prices.

• The Independent has asked experts to explain small ways you can stretch your money, including managing debt and obtaining items for free.
• If you need to access a food bank, find your local council’s website using gov.uk and then use the local authority’s site to locate your nearest centre. The Trussell Trust, which runs many food banks, has a similar tool.
• Citizens Advice provides free help to people in need. The organisation can help you find grants or benefits, or advise on rent, debt and budgeting.
• If you are experiencing feelings of distress and isolation, or are struggling to cope, The Samaritans offers support; you can speak to someone for free over the phone, in confidence, on 116 123 (UK and ROI), email jo@samaritans.org, or visit the Samaritans website to find details of your nearest branch.

British households therefore find themselves facing desperate circumstances as we head into autumn, with the cost of living already spiralling and inflation now at a 40-year-high of 10.1 per cent, driving up the price of essential goods.

Without financial help, millions of people face being plunged into fuel poverty this year, struggling to heat and power their homes.

Charities have warned of an inevitable rise in destitution as people on the lowest incomes become unable to afford basic necessities like adequate food and clothing.

Alexa Knight, associate director for policy and practice at the charity Rethink Mental Illness, said the rise in bills amounted to a “hammer blow” to households across the country.

“Mental health and money worries are intrinsically linked, and we urgently need a clear response from government to an economic crisis that has the potential to fuel a mental health emergency.

“There is a growing feeling of powerlessness which will not subside until we see concrete plans from the government about how they will provide targeted support through the difficult months ahead.

“With mental health services already facing record demand, we need more than a recognition of the problem. We need urgent action to address the gravity of the situation people are facing. This cannot arrive a minute too soon.”

The government did announce a package of support measures earlier this year, although it is becoming increasingly clear that more action will be needed imminently (Ofgem chief executive Jonathan Brearley said as much after announcing the new cap).

Former chancellor Rishi Sunak’s headline gesture this spring was knocking £400 off household energy bills, alongside a £650 one-off payment for around eight million households on means-tested benefits; a £300 one-off payment to over 8 million pensioner households to be paid alongside their Winter Fuel Payment (WFP); and a £150 one-off payment for around 6 million people across the UK who receive certain disability benefits.

Nothing further has been forthcoming from Boris Johnson’s “zombie government” with the Tory leadership race underway, pitting Mr Sunak against foreign secretary Liz Truss, the more likely victor.

Ms Truss has pledged “immediate support” should she win the keys to 10 Downing Street on 5 September and would be expected to call an emergency budget but she has previously expressed disdain for “handouts” and insisted that cutting taxes is the best way to revive the British economy, an argument heavily contested by many economists.

The current chancellor, Nadhim Zahawi, has insisted “nothing is off the table” when it comes energy bills but added that a freeze in the price cap – advocated by Labour leader Sir Keir Starmer – would not deliver “targeted help” for those who need it most.

Rishi Sunak and Liz Truss ( Jacob King/PA)

The reason for the climbing price of energy is a squeeze on wholesale gas prices around the world that began to take hold in 2021, caused in part by the rapid pace of the economic bounceback after the outbreak of the coronavirus pandemic at the start of 2020 led to a year of historically-low global energy consumption as businesses shut down and traffic came to a standstill.

The recovery saw demand soar accordingly, with further strain placed on global supplies by the bitter winter experienced in the northern hemisphere in 2020/21 and by the balmy summer just experienced in Asia, particularly in China, where demand for air-conditioning units to cope with the sticky heat skyrocketed.

A relatively windless summer in Europe and droughts in Brazil also meant that the amount of green energy generated by turbines and hydropower for storage was lower than anticipated.

Russian gas giant Gazprom, while still honouring its long-term contractual commitments, declined to replenish its storage sites in Europe to the usual extent in order to protect itself against market fluctuations and the gradual closure of the Groningen fields in the Netherlands also had an impact.

Another factor coming into play, according to the International Energy Agency (IEA), was the delay to crucial infrastructure repairs because of the pandemic.

“The Covid-19 lockdowns pushed some maintenance work from 2020 into 2021, which weighed on supply at a time when demand was recovering,” the IEA said.

“The impact was particularly tangible in the UK and Norwegian areas of the North Sea Continental Shelf. In addition, unplanned outages at LNG liquefaction plants, upstream supply issues, unforeseen repair works, and project delays all further tightened the global gas market.”

Belatedly complicating the picture still further has been the outbreak of Russia’s war in Ukraine, which has already seen Germany block regulatory approval of the Nord Stream 2 pipeline as punishment for Kremlin aggression and Dmitry Medvedev, deputy chair of the Russian Security Council, respond with a sneer: “Welcome to the brave new world where Europeans are very soon going to pay €2.000 for 1.000 cubic meters of natural gas!”

It is by no means impossible that Russia could partially or even entirely suspend gas supplies to Europe this winter as punishment for the sanctions imposed on it by governments around the world opposed to its invasion, further exacerbating the problem.

As a result of this perfect storm of geopolitical and meteorological factors, wholesale gas prices have spiralled.

The UK has been particularly hard-hit by all of this as 85 per cent of British homes are run on gas central heating and because we are both reliant on imports and have insufficient storage infrastructure in place to retain supplies.

The consequences are expected to be dire for around 22m households, prompting popular money-saving expert Martin Lewis to caution: “There are lots of people out there that can afford the increase and won’t like it, but there are also millions of people who will be thrown into fuel poverty, who will get close to having that choice between heating and eating.”

As Ofgem has done, Mr Lewis advised people to speak to their supplier about possible payment plans and suggested households check whether they are eligible for the government’s Warm Home Discount or WFP and to defy the conventional wisdom to shop around for a better deal – at present, they are simply not available.

The price comparison site Moneysupermarket has reluctantly reached the same conclusion.