What you need to know about energy prices

·5-min read

You’ve probably never heard of CF Industries Holdings.

But news that rocketing gas prices have forced the million-tonnes-a-year fertiliser producer to close its two north of England plants is indicative of the turmoil currently taking place in global energy supplies.

A turbulent energy market and rising wholesale prices aren’t just problems being faced by big business.

In the end, they affect household supplies and the bills we pay as domestic customers as well.

In recent weeks, you may also have read that several smaller energy companies, including People’s Energy, Utility Point, PFP Energy and MoneyPlus Energy have ceased trading.

That makes these worrying times for energy customers.

Here’s what’s been happening, how your energy bills could be affected, and what you can do to minimise the impact on your household finances.

Prices on the up

Not only are wholesale energy prices on the up, they’ve risen to record levels of late.

For example, gas prices have risen thanks to growing demand coupled with a loosening of pandemic restrictions. Low gas storage stocks and maintenance work affecting North Sea supplies have also added to the upwards pressure in price.

How does it affect me?

As an energy customer, the impact you’ll feel on the back of rising wholesale prices depends on the type of energy tariff that you’re on, as well as how your supplier buys its wholesale supplies.

Read here to understand your tariff and other aspects of your energy bill.

  • Variable rate tariff customers As the name suggests, a variable rate tariff can alter but your supplier must give you 30 days’ notice of any price increases.

  • Am I protected by the price cap? The energy price cap is decided by the UK regulator Ofgem. It only applies to standard variable rate default tariffs (see below). Customers on their supplier’s non-default variable rate deals could experience price rises well beyond the cap’s level.

  • Fixed-rate, fixed-term tariff customers These are a good defence against rising prices because, as the name suggests, prices are locked in for the length of your contract.

  • What about when a fix comes to an end? In recent weeks, the typical cost of fixes have soared ever higher, so customers nearing the end of a tariff’s lifespan could find themselves being charged a lot more for their next fixed contract. It’s possible that variable rate deals could even work out cheaper. Going forward, fixed tariffs could remain expensive relative to prices in the first half of 2021.

How does the price cap work?

Ofgem restricts the amount that energy suppliers can charge their default tariff customers (about 11 million UK households). From 1 October this year the cap is rising by about 12% to allow companies to charge more because of rising wholesale prices.

Will the cap protect my energy bills?

Probably not. Ofgem made its latest pronouncement earlier this summer and plenty has changed even in that relatively short period of time.

The new cap (starting in October) was worked out using a gas price of £63 per therm. Unfortunately, the price has soared to as high as £177 per therm in recent days, with a 12-month ‘forward price’ (the price you pay when committing to buying a year in advance) of up to £135 per therm.

For electricity, the price-per-therm used by Ofgem was £70, but has recently spiked to £181 and has been trading at £140 for 12 months forward pricing.

When the next review takes place in February 2022 (coming into practice in April) there’s a strong possibility that the cap will leap upwards again.

What does this mean for suppliers?

In a nutshell, it’s not great news. Several smaller energy suppliers have already ceased trading in recent weeks.

Not that consumers who have contracts with these companies should worry unduly about this. Ofgem has a backstop in place which means customers of those companies affected are switched to another supplier automatically.

Why are wholesale prices on the rise?

  • Rising demand Last winter was especially cold across winter and more businesses are also re-opening as the pandemic has started to loosen its grip on the economy.

  • Lack of wind There is a distinct shift to renewable energy sources such as wind, solar and wave. But unseasonably calm weather in recent weeks has led to less energy than expected being supplied by wind farms. This, in turn, has pushed up the price of traditional fuels such as natural gas.

  • Supply interruption Only this week an important interconnecting electricity supply cable between England and France was damaged by fire limiting what can be transmitted from the Continent.

  • Move away from ‘dirty’ fuels A push to cleaner fuels means that coal-power generating plants have been taken out of service and, while they can be brought back online, it’s a lengthy process.

What can energy customers do?

There is currently so much turbulence in the domestic market that many suppliers have withdrawn most, if not all, of their deals. This is because they simply cannot afford to take on new customers.

The good news is that, as prices settle, we can expect more deals to come on to the market. An easing of supply issues will help in this regard as well.

If you’re on a fixed-rate tariff with several months left before the contract expires, the best advice is probably to sit tight and see what market conditions are like just before the term expires.

Check the market

Where you’re on a fix that is about to come to an end, you need to scrutinise the market and see if you can find a reasonable deal.

Your current supplier may be able to offer you a replacement fix or talk to them about their default tariffs. Given the current state of the market, it’s possible a default option could prove the best choice at the moment.

Customers on variable rate tariffs need to keep watching out for the best deals on the market: either from an existing supplier or, if it makes sense financially, to switch to a rival.

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