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Why Are Energy Prices Going Up?

Are you wondering why are energy prices going up? Increasing demand, restricted supply, a lack of storage capacity, and the situation in Ukraine have resulted in skyrocketing energy costs. Therefore, we are seeing this spike in bills for homes and companies in the UK.

The government has stated that it would extend a new version of the energy price cap, known as the "energy price guarantee." It will include enterprises and companies. This implies that the projected domestic price ceiling of £3,549 per year will be replaced with a £2,500 cap.

The Energy Price Guarantee, unlike the price cap, will also apply to corporate users. The government has announced that this policy would be in effect for six months beginning in October. 

It will review in these three months to see if it should be extended for enterprises in more susceptible industries. But the facts remain unknown, and the government's suggestion remains "business as usual." 

Is there a price cap for businesses in the UK?

The government has stated that a new version of the energy price cap would be extended to companies. The energy price guarantee will apply to both commercial and residential energy consumers.

What do we know about the corporate energy price guarantee?

Here is what is currently known about the energy price guarantee and information about why are energy prices going up:

It will be accessible to all firms between October 2022 and April 2023 for a period of six months.

In three months, the government will determine if enterprises in more susceptible industries, such as hospitality, should have the price guarantee extended beyond its scheduled expiration date.

It is predicated on a new domestic limit for the typical household of £2,500 per year.

Read More: Will Energy Prices Go Down?

What we do not know about the corporate energy price guarantee?

Although the news of corporate backing is encouraging, there are a few points that need clarification, including:

What will the maximum unit rate and fixed fee be?

Does the energy price guarantee apply to all commercial energy consumers or just those on out-of-contract rates?

What will the energy tariffs for businesses be next April?

We should have answers to these questions and more within the next few days. However, feel free to contact us if you have further inquiries, and we'll get back to you with more information.

Why are energy costs so volatile?

With the total shutdown of Nord Stream 1, and the massive pipeline that transports Russian gas to Germany, supply concerns have become a major factor. This has drastically decreased the quantity of gas in Europe. 

It has contributed to natural gas prices reaching their highest levels since the beginning of March. This is the reason why are energy prices going up all of a sudden.

In conjunction with the strong worldwide demand for energy, these supply bottlenecks are driving up prices. This is contributing to rising prices and worries of an impending recession.

Our technology-enabled professionals have been able to offer vastly different prices for corporate energy. Since August 2021, providers have hiked out-of-contract gas costs by an average of 180%. However, out-of-contract electricity rates have grown by an average of 130%

The reason energy providers are charging such high rates (if they are offering any rates at all; some have had to temporarily withdraw from the market) is that wholesale energy costs are at historic highs.

Here's why these wholesale prices influence the cost of gas and electricity for everyone:

  • Suppliers purchase energy from the wholesale market before selling it to residential and commercial users.

  • When wholesale prices rise, energy providers raise their rates to cover the additional expenses. It results in higher energy bills for everyone.

Switching to a fixed-rate package can protect you against mid-contract price increases, but your rates will likely increase at the following contract renewal. A rise in wholesale energy costs is nothing new - market prices are constantly fluctuating – but they are presently so high and unpredictable that it is impossible to estimate what they will be tomorrow, much alone in a year.

What are the current wholesale energy costs?

In the previous year or two, energy costs have increased slowly, but in the last few weeks, they have almost doubled. These are the most recent wholesale gas and electricity prices from Ofgem and ICIS.

  • Wholesale gas prices exceed 420p per therm* (around 29 kWh)

  • Wholesale power rates exceed £439 per megawatt-hour* (1,000 kWh)

What are the current energy tariffs for businesses?

So, why are energy prices going up for businesses? The energy costs paid to your business will depend on the size and nature of your company, as well as the quantity and timing of energy use. Additionally, the location of your company will impact the prices you pay.

How energy costs may increase in 2022?

In recent months, wholesale energy costs have varied. Following a sharp surge in December 2021, prices have been especially unpredictable in 2022. Although they have fluctuated considerably, the general trend is up. 

How long will it continue?

In recent weeks, one of the most concerning developments has been the increase in forwarding contracts for gas supply months or years in advance on wholesale markets. Traders currently anticipate that exceptionally high gas prices will continue until at least 2023 and maybe into 2024. 

Russia, which supplied 40 percent of Europe's supply before the crisis, is not expected to recover to its former position as a dependable market supplier.

Other European nations have filled their massive gas storage tanks over the spring and summer in preparation for the next winter, but the United Kingdom lacks such facilities. Plans to revive Rough, the biggest storage facility in the United Kingdom that was shut down in 2017, will arrive too late for this year.

Take Away

Assuming the constraints in Russian supplies and depletion of storage, European supplies will begin from a lower base. Even though the United Kingdom is not directly dependent on Russian gas, supply problems in the rest of Europe will have an effect on UK pricing as competition for suppliers grows.

Norway provides around 40% of the United Kingdom's gas supply and 25% of Europe's overall consumption. Additionally, there will be rivalry with Asia for shipments of liquefied natural gas by sea.

In a situation of constrained Russian supply, the most probable way for prices to finally decrease is if demand falls significantly, but this would need a severe recession. If you have any questions about why are energy prices going up and how to prevent it, contact Utility4Business today!