What’s happening in the market right now and why you are seeing such a big increase from before?
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:
The price increase rocketed when a fire at the National Grid site in Kent knocked out a power cable that runs between England and France and is used to import electricity from the continent.
The National Grid has warned a Kent power plant will not be up and running again until 2023.
The problem with low gas reserves can 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.
Back in the first lockdown of early 2020, 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 declined at just over £24 per MWh in April and May last year – at the height of the first lockdown.
Prices have been progressively increasing since then. In September 2020, wholesale electricity costs were £45.30 per MWh and prices are now well past pre-pandemic levels:
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, and the business energy suppliers have followed suits.
With suppliers closing down left right and centre and the great uncertainty and volatility in today’s market prices are unpredictable.