Why Russia invading Ukraine could increase your energy bills

Soaring energy prices and inflation are hitting UK households amid a worsening cost-of-living crisis that is leaving many Brits struggling to pay their bills.

Household budgets are set to be squeezed even tighter from April when the energy price cap increases by 54% – meaning the average annual energy bill will rise by £693 to £1,971.

Prices are high because energy companies pay a wholesale price to buy gas and electricity, which they then sell to consumers. As in any market, this can go up or down, driven by supply and demand.

Read more: Ukraine crisis: Putin pulls some Russian troops back from border

Prices have skyrocketed recently due to a number of global factors, including high EU carbon prices and low gas storage levels.

The situation has been exacerbated by lower-than-normal Russian gas supplies and the threat of Western sanctions on Moscow over its actions on the Ukraine border that could mean even further supply disruptions.

While Russia only provides a fraction of the UK's gas (less than 5% of all imports) it supplies up to 40% of Europe's. Any disruption to this is likely to have a knock-on effect on the wholesale cost of gas and oil that Britain imports and make it more expensive.

Energy suppliers would then pass on their higher wholesale costs to consumers through their retail tariffs. In Britain, for example, on a dual fuel bill (electricity and gas), the wholesale cost can account for 40% of the total.

For consumers, the crisis is already hitting hard and, on Sunday, petrol prices at the pump hit 148.02p per litre – higher than the previous record high of 147.72p on 21 November last year.

A number of Nato countries, including the US and the UK, have threatened sanctions on Russia should it invade Ukraine. There are fears that Putin could retaliate to such measures by pushing up gas and oil prices or interfering with supplies.

Neil Kenward, director for strategy and decarbonisation at Ofgem, told MPs in parliament last week that potential price rises linked with Russia and Ukraine mean it's "impossible" to say how expensive energy could become.

"If Russia invades Ukraine, and let's say there was a sanctions regime that meant Russia limited gas to Europe, that would drive high price rises," Ofgem CEO Jonathan Brearley added.

"And, yes, ultimately feed through to customers and that could be at the scale of what we've seen before."

The relationship between continental Europe and Moscow's gas is a complex one, particularly following the development of Nord Stream 2 – the new gas pipeline between Russia and Europe across the Baltic Sea that would ease prices in the continent.

Compared to some of its allies, France and Germany have taken a more measured approach in their rhetoric towards Russia in recent months.

This has led to divisions between themselves and Nato partners such as the US and UK over how best to deal with the threat posed by Moscow on issues such as an invasion of Ukraine.

US president Joe Biden has said the pipeline won't move ahead if Putin's troops enter Ukraine, while Boris Johnson has specifically called on Europe to hem in its reliance on Russian gas.

"The job of our diplomacy now is to persuade and encourage our friends to go as far as they can to sort this out and to come up with a tough package of economic sanctions because that is what this situation requires," Boris Johnson told MPs in January in which he spoke about Europe's reliance on Russian gas.

And on Monday, he reiterated the sentiment.

"What I think all European countries need to do now is get Nord Stream out of the bloodstream," said Johnson. "Yank out that that hypodermic drip feed of Russian hydrocarbons that is keeping so many European economies going.

“We need to find alternative sources of energy … and get ready to impose some very, very severe economic consequences on Russia.”

Read more: Ukraine: Europe must 'prepare for the worst' on fears of Russian invasion, says Nato

On Tuesday, at a joint press conference with German chancellor Olaf Schloz, Putin insisted that Nord Stream 2 was a "purely commercial" project - seemingly in an attempt to play down fears that gas supplies could be impacted if the political situation with Ukraine worsens.

As it is, the escalating tensions continue to spook the markets. On Monday, oil prices surged more than 2% to their highest in more than seven years in reaction to the crisis.

Watch: ‘Mixed signals’ coming out of Russia about prospect of Ukraine invasion, says PM