Why are energy prices rising?

byLes Roberts on September 28th 2021

Wholesale gas prices have risen by 250% since January - with a 70% rise in August alone - according to OGUK, which represents the nation’s offshore oil and gas industry. And while it would be easy to blame Brexit for supply issues, the truth is there's no single reason why energy prices are suddenly going through the roof. 

It's down to a series of events that have conspired to hit at once, including:

  • Gas shortages across Europe, caused by a prolonged cold winter over 2020 and 2021 that drained natural gas storage.
  • A high demand for liquefied natural gas (LNG) from Asia leading to lower LNG shipments to Europe.   
  • Delays and complications to the Nord Stream 2 pipelines, which is an $11 billion link across the Baltic Sea with the capacity to send 55 billion cubic metres of gas a year directly from Russia to Europe, bypassing Ukraine (hence the complications).
  • Low winds resulting in lower renewable energy generation. This, coupled with outages at some nuclear power stations, means that a higher percentage of our electricity generation is using gas during its production.

Then there's the fire at a National Grid site in Kent that has knocked out a power cable that runs between England and France and is used to import electricity from the continent. National Grid has said this could cut the amount of electricity available to the network until October 13. 

The problem with low gas reserves can even be traced all the way back to 2017 when the decision was made to close the UK’s largest gas storage plant. Although it was closed due to safety concerns, it was not considered cost-effective to rebuild or refurbish the site, even though there were warnings that we could be hit with more volatile winter gas prices as we become more and more dependent on energy imports.

And then we have the knock-on effect of the pandemic.

Let's quickly go back to the first lockdown of early 2020, when a drop in demand saw energy prices drop to their lowest ever levels. Although wholesale prices had been dropping since hitting a high of £67.69 per Megawatt-hour (MWh) in September 2018, things bottomed out at just over £24 per MWh in April and May last year - at the height of the first lockdown.

Prices have been steadily increasing since then. By September 2020, wholesale electricity costs were £45.30 per MWh and prices are now well past pre-pandemic levels:

  • Gas is now more than £80 per therm* (around 29 kWh)
  • Electricity is now more than £80 per MWh* (1,000 kWh)

*see graphs below

An increase in demand is a big driver behind the price hikes.  

A greater need for energy since the crash of March and April last year has seen gas prices increase five-fold and return to pre-pandemic levels. For the wholesale electricity market, there has been a reduction in available power supplies compared to last year which, combined with higher gas prices, has led to an increase in the wholesale price of electricity.

An increase in network and policy costs is also pushing up prices. 

Higher electricity distribution and transmission costs have driven a rise in network costs, as has an increase in policy costs, such as the Renewable Obligation (RO). For reference, the RO is a levy placed on all licensed electricity suppliers to encourage them to source a proportion of the electricity they supply from renewable energy sources.

Suppliers are being hit by 'bad debt' as a result of the pandemic, which means many lost money because customers simply can't afford to pay their energy bills. 

Ofgem, the UK energy regulator, has recently increased the domestic energy price cap to help suppliers recover money lost in this way over the last 12 months, so there's no reason why business energy suppliers won't do the same.

For more information on the types of things that can affect energy prices, check out Why compare business energy tariffs?

How energy prices are rising in 2021

Energy prices have been steadily rising over the year, but gas prices have been particularly volatile over the last couple of months.

The graphs below from Ofgem's wholesale market indicators show how both gas and electricity prices have risen throughout 2021.  

How have gas prices increased in 2021?

Ofgem graph showing how gas prices have steadily increased each month throughout 2021.

How have electricity prices increased in 2021?

Ofgem graph showing how gas prices have steadily increased each month throughout 2021.

Source - Ofgem and ICIS

Will the energy price cap increase affect business owners?

Millions of UK households will be hit with higher energy bills later from October 1, as Ofgem has announced the energy price cap on standard variable rate tariffs will increase. But will the rate rise also affect small business owners? 

The price hikes will impact around 11 million households across the UK. Anyone on a standard variable rate tariff will see their annual bills increase by £139 to £1,277 a year. Prepayment customers will be hit even harder with a hike of £153 that will see bills rocket from £1,156 to £1,309. 

This is the price cap's highest level since it was introduced in January 2019. 

It's worth noting that the cap sets the prices that suppliers can charge for each unit of energy, but that does not mean there is a limit to how much people can pay. The figure of £1,277 is the average a household can expect to pay if they're on their supplier's standard variable rate tariff

In short, the more gas and electricity you use, the higher your bills will be.

But what does this mean for SMEs? 

Whether you run your small business from home or trade out of a commercial property, the price cap is still likely to affect you in one way or another.

If you run your small business completely from home, you might not even have switched to a business energy deal, in which case you'll be directly affected by the cap in one of two ways:

  1. Your rates will increase in line with the price cap if you're on a standard variable rate tariff
  2. Your supplier will increase the price of its fixed-rate deals, meaning you might feel the pinch next time you switch energy suppliers

If you run a business from home, it naturally follows that you'll use more energy than if you were spending your working hours at commercial premises, particularly as winter kicks in. And the more gas and electricity you use at home, the bigger your household energy bills will be. Check out our Bionic guides to find out more about business energy deals and working from home, along with some energy saving tips to save to help cut your bills. 

But even if you have bespoke business gas and business electricity deals, you could still be indirectly affected by the energy price cap rise as supplies increase rates to cover their increased costs.  

In the domestic market, this means that any new energy deals that are introduced come with higher rates that bring them closer to the price cap. This 'bunching' of rates has become the norm since the cap was introduced. 

The knock-on effect for business owners is that suppliers could do the same with their business energy rates. If your commercial deal is due to end soon, speak to the tech-enabled experts at Bionic now to lock in rates and avoid the October price hikes. 

Why were energy prices falling?

There were a number of reasons why energy prices fell so dramatically, including:

  • The spread of coronavirus has seen gas and energy prices plummet due to reduced demand.
  • As British winters go, we’ve had a pretty mild one, which has meant less demand for gas.
  • The raging winds we’ve seen this winter have helped supply more renewable power at lower prices, while an oversupply of liquefied natural gas (LNG) has led to cheaper gas generation.

But energy prices have been back on the rise since hitting a low towards the end of July 2020 and the current situation means costs have gone beyond pre-pandemic levels.

Things to think about when choosing an energy deal

Not all business energy tariffs are the same - if you choose the wrong one, your business will pay too much for gas and electricity.

And because signing up to a business energy deal means you're locked in for the duration of the contract, you could be paying too much for anything up to five years.

This might leave you wondering whether it's worth bothering at all - here's why it definitely is worth comparing business gas and business electricity deals.

If you’ve never switched business energy suppliers, your current provider will have you placed on an expensive ‘out of contract rates’ deal, which can cost up to twice as much as contracted rates.

When switching, you'll need to bear in mind that the rates you're offered will depend on things like the amount of energy you use, the location of your business premise, and whether or not your business is in good financial shape - a poor credit score could see you paying higher rates, as your business is seen as a higher risk.

It's also worth knowing that business energy suppliers don’t offer dual fuel deals, so even if you agree to a gas and electricity deal with the same supplier, these will still be two separate energy contracts.

How to switch business energy suppliers

The quickest and simplest way to find the best business energy deals is to speak to the tech-enabled human experts at Bionic. 

Just give us your business names and postcode and we'll use smart data and our own expertise to find the best business gas and business electricity tariffs for your business in a matter of minutes.

To get started, pop your business postcode in the box at Bionic.co.uk, or give us a call on 0800 086 1326.

Our business energy experts will then search for the best deals from our panel of trusted and quality UK energy suppliers, then help you choose the right energy tariff over a short call.

You just then need to decide which deals you like best, and we’ll take care of the rest. And there's no need to worry about renewals either, as we can find you the best deals year after year.

What if you're moving to new business premises?

If you're relocating your business, one of the following two things will happen to your energy contract:

  1. It will be transferred to your new premises.
  2. It will be cancelled and you will have to set up a new contract at your new premises.

When you sign up to a business energy deal, you're rarely allowed the leeway to leave it early. This is because your supplier will buy the right amount of energy to see you through the duration of the contract, so it stands to lose out if you terminate it before the agreed end date.

Relocating your business offers a rare chance to end your current business energy contract early and switch to a better deal, but you need to need to weigh up the options before making the decision to switch.

If you transfer your existing energy deal to your new premises, your supplier will take care of this for you, so there are no issues and your only billed from the first day you move into the new place.

If you switch to a new deal with another supplier, you’ll need to arrange the payment of your final business energy bill or sort out any refund you might be due if your account was in credit.

If this seems like too much hassle, bear in mind that switching could save your business hundreds of pounds a year, and switching with Bionic means our tech-enabled experts will take care of all the hard work for you to ensure a seamless switch.