Why are energy prices so high? Are they still going up?

Les Roberts, Senior Content Manager at Bionic
By Les Roberts, Senior Content Manager

Updated January 10, 2024

2023 has seen energy prices stabilise after some extraordinary price volatility in 2022. Even so, prices are still double what they were at the start of 2021 - for context, while energy prices have increased by around 100% during that time, the rate of inflation over the same period has been about 11%.

And while a price cap has been in place for households since 2019, there isn’t one (and there never has been). Instead, the government introduced a couple of discount schemes. The first was the Energy Bill Relief Scheme. This ran for six months from October 1, 2022.

This scheme was replaced by the Energy Bills Discount Scheme on April 1, 2023. This will run until March 31, 2024. But funding for this scheme was cut dramatically and prices haven't gone beyond the required threshold since December 18, 2022 - months before the scheme even kicked off.

As a business owner and householder, there are two things you need to consider:

  1. The energy price cap will increase by £94 from January 1, 2024 - up from £1,834 to £1,928 per year. But remember, it's the unit rates that are capped, not the final bill. If you use more energy than the average household, you'll pay more than the cap level.
  2. There is no price cap on business energy. Although business energy rates might be falling, prices aren’t capped and government support has been cut considerably since April 1.

Energy prices reflect the live market and move weekly. A drop in wholesale prices has seen rates drop by 50% since October, but we can’t predict or guarantee how prices will change in the future.

Ofgem has said that: "in the medium term, we're unlikely to see prices return to the levels we saw before the energy crisis", so securing your rates today can still protect you against market volatility.

But what exactly do current wholesale rates mean for the cost of your business energy bills? Why have energy prices been so volatile and why are they levelling off after a rapid fall in rates at the start of 2023? Let's take a closer look.

Why are we seeing falling energy prices? 

Energy prices rocketed as we entered the second half of 2022. But a relatively mild winter across the UK and much of Europe, coupled with the energy-saving efforts of homes and businesses worried by the prospect of unaffordable energy bills, helped to cut demand and caused a drop in prices across 2023. 

The energy market has also calmed down a bit after the shocks of Russia's invasion of Ukraine, the closure of Nord Stream 1, and other infrastructure issues that saw prices rocket. This has been helped by European countries cutting their reliance on Russian gas by filling storage facilities with liquified natural gas from across the globe.

Prices continued to fall as demand naturally decreased across spring and summer, but they're still around twice as much as they were at the start of 2021. Wholesale prices are still higher than pre-pandemic levels, and the experts at Cornwall Insight, energy market intelligence analysts, have suggested that prices might not return to pre-pandemic levels this decade. 

So, while wholesale prices have fallen, energy is still very expensive.

Alex Staker, Head of Commercial Operations at Bionic, explains why these price drops aren't always passed on to customers: "It's to do with the way energy is bought and sold and the risk associated with this process. To be able to offer fixed rates, energy suppliers need to buy power in advance of selling it to customers. This means the rates at which they have bought wholesale energy to sell today might differ from the current wholesale rates.

"Suppliers also need to factor risk into their price calculations, in much the same way as finance providers factor risk into the prices they charge for credit. 

"Energy suppliers are continuously buying energy to make sure there's enough to cover demand. If demand exceeds supply then they need to buy more at current market prices to cover the shortfall. But if supply exceeds demand, then suppliers need to sell the excess energy back to the grid - if the day-ahead price is lower than the price they bought the energy for, then they'll lose money. 

"When the market is so volatile, the risk to suppliers is greater and so prices go up. And this is also part of the reason why it can take time and a consistent run of lower rates for any price drops to be passed on to customers."

As you can see from the graphs a bit further down the page, prices have been very volatile for the last 12 months and prices could continue to vary dramatically for as long as the market remains so unpredictable.

How much are wholesale energy prices right now? 

The latest Ofgem and ICIS forward delivery contract rates (which are the wholesale prices that suppliers typically pay for the energy they supply to customers) for gas and electricity are:

  • Wholesale gas costs around 135p per therm* (around 29 kWh) 
  • Wholesale electricity costs around £120 per MWh* (1,000 kWh) 

To get an idea of how much prices have dropped recently, we need to take a look at the day-ahead contract rates. These show how prices change in the spot market (where energy is bought and sold to meet demand) and influence the forward delivery contract rates.

According to Ofgem and ICIS figures, the latest day-ahead contract rates are:

  • Wholesale gas costs around 84p per therm* (around 29 kWh) 
  • Wholesale electricity costs around £90per MWh* (1,000 kWh) 

What are the latest rates?

The rates your business is charged for energy will depend upon the size and type of your business, as well as the amount of energy you use and when and how you use it. The location of your business will also have an effect on the rates you pay.

To give you an idea of how much business energy rates currently are, here are the average business gas and electricity rates based on business size.  

Average business electricity prices per KWH April 2024
Latest business gas rates April 2024

Are energy prices still rising?

After a steep increase in wholesale prices during December 2021, prices remained volatile across 2022 and into 2023. But since December 2022, the overall trend has been that prices are falling. There's no guarantee this will continue, so we'll keep monitoring the market to keep you up to date.

The graphs below from Ofgem's wholesale market indicators show how volatile gas and electricity prices have been over the last few years. Although prices dropped across 2023 and are no longer as volatile, rates are still around double what they were in early 2021.

Ofgem graph showing how gas prices have been very volatile. Sharply rising in 2022 before falling across 2023.
Ofgem graph showing how electricity prices have been very volatile. Sharply rising in 2022 before falling across 2023.

Source - Ofgem and ICIS

But what has been behind this unprecedented price volatility?

What causes energy price volatility?

Supply and demand are also big issues when it comes to price volatility. When energy is in short supply then prices tend to go up, but will usually drop again when supply levels are greater. And it's the same with demand - prices go up when demand is high but usually fall again when demand is less.

Price volatility has been a big issue over the last year or so because normal supply and demand issues have been coupled with a series of global events that have pushed prices up further. For instance, the role the pandemic has played in causing huge global supply and demand shocks can't be underestimated. Neither can the impact of the war in Ukraine. 

Price volatility is always a concern for energy suppliers, which is why they typically trade on futures markets to help increase certainty about supply and prices for consumers. This means suppliers can buy or sell a set amount of gas or electricity at a specific price, for settlement on a specific date in the future. 

But prices have been so volatile that suppliers have found it more difficult to trade in this market and may have to provide extra collateral to cover the risk of supply shortages. This has seen some suppliers pull out of providing prices when rates have spiked.

We've seen some huge variations in the rates our tech-enabled experts have been able to quote for business energy. And with no commercial cap in place, suppliers have increased out-of-contract gas rates by an average of 180%, and out-of-contract electricity rates by an average of 130% since August 2021.  

The reason energy suppliers are currently quoting such high rates (that’s if they’re able to quote any rates at all - some have had to temporarily pull out of the market) is that wholesale energy prices are currently at record high levels. 

Here’s why these wholesale rates affect the price we all pay for gas and electricity: 

  • Suppliers buy energy from the wholesale market and then sell it to domestic and business energy customers 
  • When wholesale prices go up, energy suppliers increase their rates to cover the extra costs and we’re all hit with higher energy bills

Switching to a fixed-rate deal will protect you against any mid-contract price rises, but you’ll probably find your rates will rise at the next renewal. 

An increase in wholesale energy prices is nothing new – market prices are always going up and down – but prices are currently so high and so volatile that it’s difficult to predict how much they will be from one day to the next, never mind in 12 months. 

This situation is helping to drive up inflation and fuel fears of a coming recession. You can find out more about this in our blog on small businesses and the cost of living crisis

government has introduced the Energy Bill Relief Scheme to help business owners with soaring energy costs. Here's more on that along with details on what's happening with energy prices.

Why are energy prices so high? 

Supply and demand issues are pushing up wholesale energy prices (that's the amount your provider pays to the energy generators for the gas and electricity they supply to your business). And it's these rising wholesale costs that are the biggest factor in the energy price spikes we've seen this year.

Although we’re all feeling the effects of rising energy prices at home and at work, it’s a global issue that’s been caused by some far-reaching and unexpected reasons. The conflict in Ukraine is currently having a huge impact on what was already a big problem with energy prices (more on that below), but the following issues have also combined to inflate energy rates: 

  • Supply shortages - Gas shortages across Europe, caused by a prolonged cold winter between 2020 and 2021, drained natural gas storage. 
  • High demand - High demand for liquefied natural gas (LNG) from Asia has led to lower LNG shipments to Europe.    
  • Closure of Nord Stream 1 - This huge pipeline transported gas from Russia to Germany. It closure has massively reduced the amount of gas that can be channelled to Europe and has helped cause natural gas prices to surge to their highest levels since early March. After first limiting its capacity to just 20%, Russia has now completely closed the Nord Stream 1 pipeline, causing a European supply shortage that's pushing up prices.
  • Infrastructure issues - The postponement of the Nord Stream 2 pipeline, 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. Although the pipeline is complete, Germany stopped it from going live in response to the Russian invasion. To highlight how much of a global issue this is, fire damage at Freeport LNG’s Texas plant has also had an impact. This has limited the amount of liquified natural gas being imported to Europe. The plant is aiming to be back up to 85% capacity by late November.
  • Life after lockdown - An increase in demand as lockdown restrictions eased across the globe. There's more on that below, in the section titled: How has the pandemic affected energy prices?

As you can see, this is a global issue. Unfortunately, the UK is experiencing its own unique problems too.

Why have UK energy prices been so high? 

We’re in the midst of a global energy crisis that is pushing prices up for everyone. But to make matters worse, the UK is also suffering from the following issues that are affecting supply, storage, and the prices we're paying for power: 

  • Lower renewable energy generation - Low winds, coupled with outages at some nuclear power stations, mean that a higher percentage of our electricity generation is using gas during its production. If you're on a green energy deal that provides 100% renewable electricity, you'll still see your rates increase. This is because the way the UK energy system works means that the price of renewable energy is tied to the price of gas - if gas prices go up, so do renewable energy prices. 
  • Fire at a National Grid site in Kent - This knocked out a power cable that runs between England and France and is used to import electricity from the continent. This isn’t expected to be fully back up and running until 2023. 
  • Low gas reserves - The UK has some of the lowest gas reserves in Europe, which means there’s almost no way of stockpiling gas to use it when needed. Capacity is equivalent to roughly 2% of the UK’s annual demand, compared with 25% for other European countries and as much as 37% in Europe’s four largest storage holders. 
  •  Insufficient government support - Although the government's £15 billion support package will see households credited with £400 over six months from October, this won't have as big an impact as measures taken in other European countries. France, for instance, has capped electricity price increases to 4% until the end of the year.
  • Issues with the energy market - 28 UK energy suppliers have gone bust since 2021. This is largely down to many of them having a business model that couldn't cope with an increase in wholesale prices. And when suppliers go bust, consumers help to absorb the cost through higher bills. For instance, when Bulb ceased trading, it was such a big supplier - providing power to around 1.5 million homes and businesses - that the government placed it into 'special administration' instead of going through the 'supplier of last resort' process. Initial estimates suggested this process would cost £2.2 billion over two years, but figures from the Office for Budget Responsibility (OBR) show that an extra £4.6bn has been spent on handling the company, which will bring the total to £6.5 billion. This could add as much as £200 on to annual household energy bills.

Why are renewable energy prices so high? 

If you're on a green deal that offers 100% renewable energy, you might be wondering why your prices are shooting up even though no gas is used to generate it.

It's all because of the way the UK's energy system works. Although renewable energy accounted for almost half (45.5%) of the UK's total energy generation in the first three months of this year, we still rely on gas-powered plants to generate some of our electricity.

And that's where the pricing issues come from. Energy prices are set using a system called 'marginal cost pricing'. In short, this means that the most expensive type of energy is used to set the price for all types of energy, including renewables. 

Even if you're on a plan that delivers 100% renewable energy, the price of your electricity is set not upon the cost of wind or solar generation, but on the cost of the last source used to meet demand. As gas-powered stations are used to top up electricity demand in the UK, so the cost of gas-powered electricity is used to set the price of all electricity. 

So, when gas prices spike, you can bet that electricity prices won't be far behind.

The system is under review until October 22, but one thing that might have gone under the radar in the Prime Minister's energy cap announcement was that renewable and nuclear power is to be moved off marginal pricing and onto Contracts for Difference. This will mean the cost of renewable and nuclear-generated energy will no longer be tied to gas prices. Instead, generators will get a fixed, pre-agreed price for the low-carbon electricity they produce during the time the contract is running. 

This de-coupling of costly global fossil fuel prices from electricity produced by cheaper renewables should help ensure consumers benefit from cheaper prices when switching to lower-cost, clean energy sources.

Will energy prices go down in 2024?

It's hard to predict energy prices at the best of times, but the current market volatility makes it impossible to say whether energy prices will go down this year. 

Forecasts from Cornwall Insight, energy research and analysts, suggest that energy prices could remain high into next year and even into 2024.

Should you fix your energy prices in 2024?

Fixing your energy rates is the only way to bill stability in an unstable market and protect against future price rises. Although we can't predict what energy prices will do in 2024, market volatility calmed significantly in 2023 and prices dropped across the year. If the market stabilises and there are no more shocks, we could see prices slowly rise again as they tend to during 'normal' inflationary conditions.

If you're unsure what to do, give our energy experts a call on 0800 860 6833. We only need your postcode to run a price comparison of rates from our panel of trusted UK suppliers.

What if you can't afford to pay your energy bills?

If you can't afford your business energy bills, you must speak to your supplier as soon as possible to sort out a repayment plan. If you don't work something out with your supplier within 30 days of your missed payment, they can start action to disconnect your energy supply. 

For more information, check out our guide to business energy bills.

Has the conflict in Ukraine pushed up energy prices? 

As outlined above, there are many reasons why energy prices are currently so high. The conflict in Ukraine has pushed rates up even higher. 

This is because energy prices are affected by things that are happening across the globe – anything from a conflict to a natural disaster in a country that produces oil or gas can affect how much we pay to heat our homes and power business here in the UK. 

One of the main reasons why this conflict is having such an impact on our energy bills is because of how reliant Europe has become on Russian gas. In 2021, Europe sourced more than 40% of gas imports from Russia and conflict with Ukraine could seriously disrupt this supply and push up prices. Although the UK isn't as heavily reliant on Russian gas, it does import almost half of its from Europe. This means any price hikes for European supply will have a knock-on effect for the UK.  

The situation is causing panic in the energy market. Wholesale gas prices have risen by as much as 33% and some suppliers have temporarily pulled out of the market. Securing your rates today is the only way to protect your business from any future price changes.  

And then there's the geopolitical situation to consider. For a concise breakdown of the current state of affairs, check out this piece in The Guardian

How has the pandemic affected energy prices? 

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: 

  • Wholesale gas costs more than 271p per therm (around 29 kWh) 
  • Wholesale electricity costs more than £257 per MWh (1,000 kWh) 

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 more than 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 prices up.  

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. 

The pandemic has also seen more energy suppliers hit by 'bad debt'. This means many have lost money because customers simply haven’t been able to afford to pay their energy bills.  

For more information on the types of things that can affect energy prices, check out our guide on how to compare business energy tariffs

Will the energy price rises ever end? 

Although it’s difficult to predict exactly what will happen in such a turbulent energy market, the chief executive of Centrica, the parent company of British Gas, has suggested there was "no reason" to expect gas prices would come down "any time soon". He even suggested that "high gas prices will be here for the next 18 months to two years". 

The government is coming under pressure to step in and help consumers by way of a VAT cut or a lowering of other charges not directly linked to the wholesale price of energy. Trade bodies, including the Chamber of Commerce and NFRN, have been urging the government to give financial help to business owners in the form of cuts to VAT on energy, a commercial energy price cap, and a Government Emergency Energy Grant for SMEs – essentially Covid-style support for this latest crisis.

What can you do to keep your business energy bills low? 

The only way business owners can currently shield themselves from out-of-contract rates and any potential future price rises is to lock in existing rates as soon as possible.  

To get a quote tailored to meet the needs of your business, give our tech-enabled experts a call on 0800 860 6833 or pop your postcode in the box on our business energy page and we’ll give you a callback. 

If you want to help cut your business energy bills, it also helps to think about how and when you’re using gas and electricity. So, consider the following: 

  • Assess when you’re heating your premises 
  • Switch appliances off 
  • Pay attention to the weather   
  • Install a smart meter to save 
  • Be mindful of water costs 
  • Turn off lights when not in use or fit light sensors 
  • Encourage all staff to be energy-aware 
  • Draught-proof your building 
  • Go paperless as much as you can 
  • Request an energy audit 

For more detailed information, check out our blog on how to save business energy (and money). 

But you also need to be realistic. Even if you put in place all of the energy-saving measures possible and cut your usage right down, there’s still a minimum amount of energy you need to use to keep your business running, so you might still feel it on your balance sheet if your energy rates rise. 

Can I predict my energy bill? 

You might think that, in theory, you could predict your energy bill before you receive it.  But it’s more complicated than just figuring out how much energy you have used because taxes and levies are also added into costs. 

To find out more about how to read your business energy bill and calculate costs accurately read our guide to understanding business energy bills

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 (even more in the current market).

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 name 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.