High energy prices: what’s causing them, and what should you do about them?

If you’ve recently used a comparison site to get a quote and have been shocked by high energy prices, you’re not alone. This article looks at what’s behind these high prices, how savings are skewed by the energy price cap, and what you should do about it all.

Since about this time last year, wholesale energy prices – the price suppliers pay for the energy they sell to households and businesses – have been creeping upwards. For homes and businesses looking for new deals, as old ones come to an end, this can mean a shock. Unit rates that were on the market 12 months ago now seem a distant memory. And for those homes that may not have switched in a while – if ever – the energy price cap is artificially reducing projected savings, putting them off switches that could ultimately save them hundreds of pounds a year. To find out why that is, read on.

What’s causing current high prices?

There have been a number of factors in play driving recent high prices. These include:

• The impact of COVID-19 | Financial difficulties faced by businesses and households as a result of multiple lockdowns are being felt by energy companies as more people struggle to pay their bills. Suppliers are increasingly pricing these costs into their tariffs. Ofgem, the UK energy industry regulator, has been looking hard at this, and February 2021 concluded that, “It’s in customers’ interests to allow suppliers to start to recover some additional costs related to COVID-19… This will help to ensure that suppliers have the finances to continue to supply energy to their customers and fulfil their licence obligations.”
• A cold spring | In normal years, warmer weather in March, April and May would see consumption of energy by homes and businesses falling. As well as allowing energy reserves depleted over the winter months to be topped up, lower demand typically equates to lower prices. This year, however, prolonged cold temperatures (April was actually colder than March) have kept demand – and therefore prices – high. (If you want to know more about what drives green energy prices, read our blog here.)
• The price of carbon | Carbon pricing is an important tool in the fight against climate change. Put simply, it means that businesses that emit carbon emissions have to pay for the greenhouse gases they’re responsible for. Each business is provided with a certain allowance by government, and if they want to produce more, they have to buy them from another organisation that has succeeded in lowering their emissions. If they don’t have enough allowances, they face heavy fines. Over time, these allowances are reduced, making it harder (and more expensive) to emit carbon, and therefore gradually increasing the incentive for businesses to find other, greener ways of working. High carbon prices are a sign the system is working, but because a large part of the UK energy market is still reliant on fossil fuels (and particularly gas), high carbon prices mean higher energy bills.*

High energy prices and the price cap

We talked about this issue on the blog back in January, but it’s worth revisiting it now. The energy price cap was introduced by Ofgem to protect households on suppliers’ most expensive ‘default’ tariffs, known as ‘standard variable’ tariffs. In particular, the price cap is aimed at customers of the largest energy firms (British Gas, EDF, E.on/NPower, SSE/Ovo and Scottish Power). These customers are often those who rarely if ever switch, and so are especially exposed to the price of standard variable tariffs being set very high.

The price cap changes every six months, and in February 2021 Ofgem set the new level at £1,138 a year for a typical dual fuel home – effective from April 2021. At the time, wholesale prices were much lower than they are now, and the price cap left plenty of room between the more competitive tariffs on the market and the high prices charged to customers on standard variable contracts. Since then, though, rising wholesale prices have pushed up the price of the best deals on the market, shrinking the projected savings for households switching from standard variable tariffs.

The chart below shows how one of our most reliably competitive suppliers, So Energy, has been forced to adjust the price of their cheapest fixed rate deal upwards as wholesale prices have risen (prices are for a typical dual fuel home averaged across all regions of Great Britain).

In normal years, Ofgem would be expected to drop the price cap when it next changes (announced August 2021 with effect from October), responding to lower summer wholesale prices. If things continue as they are, however, it’s difficult to see them doing this, and instead they may be forced to further increase the level of the cap. If so, those customers on standard variable tariffs who have been projected small savings now, will suddenly see their bills increase – making the deals that are available right now look a lot more appealing.

Of course, the opposite is also true – if wholesale energy prices fall between now and August and Ofgem lowers the price cap, current fixed rate tariffs could end up looking less appealing. At the moment though, this looks very unlikely, and current projections are for an increase of between £50 and £100.

So, what should I do about current high energy prices?

If you’re a household

If you’re coming to the end of your previous energy deal, or already on a variable tariff, your decision needs to come down to how you feel about risk:

• If you prefer certainty, you should switch to the most competitive fixed rate deal now. That means ignoring how the unit rates compare with any previous deal you were on, which reflect energy prices from a year ago or more, and focusing on limiting your exposure to further price rises by locking in a deal now. Providing you don’t use more energy than normal, that will mean you have certainty about how much you’ll be paying for your energy over the next 12 months (or more – some of our most competitive fixed rate offers are 2 year deals). If you want to give yourself the option of swapping if wholesale prices drop, look for a supplier with no exit fees on their fixed deals (like Octopus) or very low exit fees (like So Energy). Exit fees are clearly shown alongside each tariff in your results when you get your quote.
• If you don’t mind the risk that prices could rise further, then it may be worth waiting. At minimum, you should check to see how your supplier’s standard variable tariff compares with others on the market – if it’s not great, consider switching to an alternative tariff but make sure it’s one that doesn’t charge exit fees, allowing you to move if wholesale prices fall.

If you’re a business

Out of contract rates for businesses are almost always the worst option, so talk to us now about finding you the most competitive deal. We may recommend you opt for a one year contract to give yourself the flexibility to move should prices ease over the next 12 months.

* As a result of Brexit, the UK recently launched its own carbon emissions trading scheme, and British businesses are in the process of transitioning from the previous EU system to the UK one. So far, the prices have been similar – if anything, the UK price has been slightly higher (at time of writing, UK carbon is trading at about £51 a tonne, while EU carbon is priced at around 53 Euro per tonne).