The energy crisis explained
Energy prices have been getting higher since 2021, and the knock on effect for bills and other expenses has been huge. It's a complex issue with tons of contributing factors.
Everybody deserves to know what's happening to their finances and why, so let's cover the main points (and some things you might not be aware of).
A quick recap of key energy crisis facts right now:
In October 2022 the UK government announced the Energy Price Guarantee as a replacement for the Ofgem Price Cap that was previously set by the energy regulator.
The Energy Price Guarantee was going to increase to £3000 a year in April 2023 after a policy update by new Chancellor, Jeremy Hunt.
The Energy Price Guarantee will now be kept at £2500 for an additional three months from April to June 2023.
A government grant to decrease energy bills by £400 over winter is ending in March '23.
These changes mean that the increase to everybody's bills is smaller than expected. Prices are staying the same, but a discount to reduce the cost is being ended by the government.
Wholesale prices for energy are finally starting to fall, but energy bills won't catch up immediately. There's an explanation of this below, just keep scrolling.
What caused the energy crisis?
This is a global energy crisis, and the causes are complex. There are lots of factors impacting prices, and lots of industry changes impacting bills.
Here are some of the initial causes of the crisis:
- Lack of gas storage: In Winter 2021/22, gas storage across Europe was too low to meet demand. Lots of countries use gas stores to meet higher demand in Winter. In Winter '21, stored gas supplies couldn't meet demand after Russia reduced gas exports. Gas supplies from elsewhere became more expensive.
- Calm weather: Less wind meant less power from wind farms in 2021. More fossil fuels were burned to generate power, a more expensive option.
- Major power cable shutdown: A fire at one of the UK’s major power cables in France shut it down. Energy from other sources became more expensive.
- War in Ukraine: Many countries placed sanctions against Russia after its invasion of Ukraine. Less Russian gas meant many European countries had to find alternate sources, making them more expensive.
- The pandemic: Demand fell at the beginning of the pandemic when everybody was in lockdown, but when restrictions were lifted demand increased sharply. Adjusting energy supplies quickly isn't an easy process, so prices went up.
All of these issues affected wholesale energy prices, i.e. how much it costs for energy suppliers to buy the energy they supply to you.
Suppliers pass increased costs onto consumers, but the way that most energy suppliers buy their energy means that the increase in costs to customers comes a few months after the increase for suppliers.
On top of this, there's some new legislation to stabilise the energy industry that makes the situation more complicated.
Why aren’t energy bills falling?
Wholesale gas has recently gotten cheaper, which you can see in the graph below. A milder winter than expected reduced pressure on gas storage, which means energy companies can pay less for energy.
This is good news, but the impact on bills won't be immediate. Here's a rundown of why:
- Energy suppliers buy energy in advance to make sure they can meet demand. This is called hedging.
- In Jan 2023, most suppliers have already bought energy up until Summer 2023.
This approach means that there's always enough to meet customer demand so the supplier can stay in business.
- It also means that suppliers have to charge the price they paid for energy to stay in business, even if wholesale prices drop afterwards.
- If what they need to charge is more than the Energy Price Guarantee, or Standard Variable tariff, the supplier would need to take the loss.
30+ energy suppliers went bust in 2021 because they didn't buy their power in advance and rising wholesale gas prices caught them off guard. When prices increased sharply, they had to buy energy at a price higher than their customers were paying for it and went under as result.
Based on wholesale prices right now, most industry experts predict that energy prices will begin to drop in July 2023, and we'll pass these tariffs on to our customers!
Some predictions go as low as £1981 a year for a typical household, but more likely projections put it at around £2200, according to a couple of sources. Check out The Guardian and Cornwall Insight for more detail.
Here's the same graph as above with some of this extra detail:
And here's a more in-depth explanation of the wholesale energy prices situation.
Energy industry changes that affect prices
In addition to the ways suppliers buy energy, Ofgem introduced new rules during the crisis to make sure companies don't go out of business when prices drop.
The Market Stabilisation Charge comes into effect when wholesale energy costs fall 10% below the current guaranteed energy price. The charge has been triggered a few times since Autumn 2022, and is reviewed weekly by Ofgem, the energy regulator.
- The charge is paid by your new energy supplier if you switch to them for a lower price. Your new supplier pays around 80% of the price difference to the old supplier as compensation for the lost company.
- This essentially means customers are charged for higher energy prices, even if their new supplier bought energy for less.
This isn't the most straightforward system, so here's an example.
In the image you can see an example scenario. FYI: The numbers here are illustrations of how the rules work, not real world figures.
Your old supplier, Supplier 1, hedged their energy supply and paid £600 for the gas and electricity for the length of your contract.
Supplier 2 didn't hedge and only paid £480 for the same amount of energy a few months later when wholesale prices were lower.
This is a saving of £120 or 20%.
If each supplier adds £400 to your bill to cover extra costs like VAT, operational and network costs, profits and fees your bill at this point would be:
Supplier 1: £1000
Supplier 2: £880
Under the Market Stabilisation Charge rules, Supplier 2 would need to pay Supplier 1 £51 if you switched to their service.
The new charge for Supplier 2's services would be £931, saving you £69 rather than the £120 that the supplier saved on energy.
Basically this charge makes offering cheaper tariffs an unappealing idea for energy suppliers, even if prices have come down. They’d need to pay money to other suppliers rather than continue to make money by keeping prices the same.
When you choose a One Utility Bill package, we can only offer the tariffs that energy suppliers offer us. At the beginning of the energy crisis we absorbed price increases from suppliers for as long as possible, since constantly changing prices isn’t a position we ever want to be in.
The cheaper July rates are really exciting news and you'll get them from us as soon as we can offer them!
How energy pricing works
Your energy bills aren't just made up of wholesale energy costs.
It costs money for suppliers to get energy to you, maintain the grid, pay their staff, and they add a profit margin on top. You also pay VAT on energy bills, which is included in there too.
Here's a breakdown of how energy bills were made up over the last year or so. As you can see, wholesale costs make up the bulk of what your bills cost.
These diagrams don't include the Market Stabilisation Charge, because that would only be added if you switch suppliers.
When will energy bills go down?
As soon as lower prices are available from the energy suppliers we work with, we’ll pass them on to One Utility Bill customers. Right now it looks like we'll be able to do that from July! The tariff you get from us is always the best we can offer.
A lot of analysts predict that energy bills will stop rising this year, and most are very confident there’ll be a significant drop from July 2023. Basically, industry experts think that April, May and June will see slightly higher bills than before, but after that things will start to come down.
Until nearer that time nobody can say for sure, but the signs are good for the second half of this year.
The Guardian reports that bills could be around £2500 a year for the second half of 2023.
More recent estimates from Cornwall Insight predict a drop to around £2200 a year in their default forecast, around £300 less than April’s prices. It could be lower or higher, depending on several factors, but all predictions are less than the April
These numbers are both a really positive sign that things could get cheaper soon.
At the start of the energy crisis One Utility Bill absorbed increased costs for as long as possible to keep our bills packages at the same rate we'd quoted. This became unsustainable as prices continued to rise. We’ll pass on savings as soon as we get cheaper rates from the suppliers we work with.
One Utility Bill works with energy suppliers, but we have no control over their prices so all we can do is be as transparent as possible on the situation as we get the information.
How your One Utility Bill package fits in
When you signed up with One Utility Bill, you trusted us to manage your bills. Making things easier isn't always straightforward during an energy crisis, but here's what we deal with for an average package behind the scenes:
It’s our job to manage bills for you. We’re the experts who deal with all your bill-related challenges and if you need support or have questions about your bills package, we're the ones to speak to.
Is there any other support available?
When it comes to other sources of support, that’s not our area, but here are some experts who could be a good place to start: