Why are energy bills still rising when wholesale prices have come down?

Wholesale energy prices are finally coming down after more than a year of record price levels during the energy crisis around the world caused by supply issues and other problems.

Check out what's happening with your bills in our energy price cap blog.

• The reduction in energy bills started mid-2023, and while prices are still likely to fluctuate slightly, the unprecedented rises in energy bills aren't predicted to return any time soon.
• But wholesale prices started to decrease long before that, leaving a lot of people confused as to why energy suppliers didn't decrease prices straight away

Here's a breakdown of how wholesale prices for gas affect your energy bills, and a bit of a deep dive on how energy prices work in general.

If wholesale gas gets cheaper, why don't bills for households go down too? 

The short version is that they do get cheaper, just not right away.

Wholesale energy prices got dramatically more expensive in 2021, which had a knock-on effect on domestic utility bills.

Wholesale gas got more expensive, which meant that electricity was in higher demand, making that more expensive too.

• In the graph below ⬇️ you can see that increases in the orange line (your bills) rise after peaks in the green line (wholesale gas prices)

This is because almost all energy companies buy their power through a process called hedging, which is buying energy in advance.

• Hedging is the practice of forecasting future energy prices and buying in bulk at those prices to meet customer demand for a set period of time.
• Hedging means the supplier doesn't go out of business if energy prices suddenly change because they always have the money (in theory) to buy the gas and electricity their customers need.
• More than 30 suppliers went out of business in 2021, because many of them didn't hedge when buying and couldn't meet rising costs.

Buying in advance means the impact of wholesale costs on bills is delayed.

Hedging is common practice in the energy market, and is a benefit to energy companies because it keeps them in business. It also helps keep energy bill prices as stable as possible for customers. "As stable as possible" doesn't necessarily mean cheap, as we've seen throughout the crisis.

 

In the graph below you can see this delay in rising costs on bills too - domestic costs for energy increased after wholesale energy costs did. 

• This graph shows the Standard Variable Tariff (SVT) for domestic energy bills contrasted with the price of wholesale gas.

• You can see that the orange line (domestic bills) consistently rises after the green line (wholesale gas prices).