A global energy crisis is underway, characterised by significant price fluctuations due to several major factors. Here’s a comprehensive overview of the situation.

What’s driving the surge in energy prices? And is there any indication of them continuing to rise?

In 2023, energy prices have stabilised following considerable volatility in 2022. However, they remain double the rates observed at the beginning of 2021. To put it into perspective, while energy prices surged by approximately 100% during this period, the inflation rate only reached about 11%.

Despite households being under a price cap since 2019, there hasn’t been one for businesses. Instead, the government implemented a couple of discount programs. The initial scheme, the Energy Bill Relief Scheme, was active for six months starting from October 1, 2022.

Subsequently, it was succeeded by the Energy Bills Discount Scheme on April 1, 2023, set to continue until March 31, 2024. However, funding for this scheme underwent significant cuts, and prices haven’t surpassed the required threshold since December 18, 2022—months before the scheme commenced.

For both business owners and homeowners, there are two key considerations to keep in mind

• Starting January 1, 2024, the energy price cap will rise by £94, reaching £1,928 per year from the previous £1,834. However, it’s important to note that while the unit rates are capped, the final bill is not. If your energy usage exceeds the average household, your costs will surpass the capped level.

• On the other hand, there is no price cap on business energy. While business energy rates might be decreasing, prices remain uncapped, and government support has been significantly reduced since April 1.

Energy prices fluctuate in response to live market conditions and can change on a weekly basis. While there has been a 50% decrease in rates since October due to a drop in wholesale prices, it’s crucial to understand that we cannot predict or guarantee future price movements.

Ofgem has noted that “in the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis.” Therefore, securing your rates now can still provide protection against market volatility.

However, how do current wholesale rates impact the cost of your business energy bills? What factors have led to the significant volatility in energy prices, and why are they stabilising after a rapid decline at the beginning of 2023? Let’s delve deeper into these questions.

What factors are contributing to the decline in energy prices?

Energy prices surged as we entered the latter half of 2022. However, a relatively mild winter across the UK and much of Europe, combined with efforts by homes and businesses to conserve energy due to concerns about steep energy bills, led to reduced demand and a subsequent drop in prices throughout 2023.

Moreover, the energy market has stabilized somewhat following the upheavals caused by Russia’s invasion of Ukraine, the closure of Nord Stream 1, and other infrastructure challenges, which initially drove prices up. This stabilization has been aided by European countries reducing their reliance on Russian gas by replenishing storage facilities with liquefied natural gas from various global sources.

While prices continued to decline as demand naturally waned during the spring and summer, they remain roughly twice as high as they were at the beginning of 2021. Wholesale prices still surpass pre-pandemic levels, and experts at Cornwall Insight, energy market intelligence analysts, suggest that prices may not revert to pre-pandemic levels until later in the decade.

Despite the decrease in wholesale prices, energy remains costly. Alex Staker, Head of Commercial Operations at Bionic, sheds light on why these price reductions aren’t always transferred to customers. He explains that the manner in which energy is procured and sold, along with associated risks, plays a significant role. Energy suppliers purchase power in advance of selling it to customers, and the rates at which they procure wholesale energy may differ from current wholesale rates. Moreover, suppliers must consider risks in their pricing, similar to how finance providers factor risks into credit pricing.

Staker further elaborates that suppliers continually purchase energy to meet demand. If demand exceeds supply, they must purchase more at prevailing market prices, potentially leading to losses if they later sell excess energy back to the grid at lower rates. Consequently, during volatile market conditions, the risks to suppliers increase, prompting price hikes. This complexity contributes to delays in passing on price drops to customers.

Prices have exhibited significant volatility over the past year, and fluctuations could persist as long as the market remains unpredictable.

What are the current wholesale energy prices?

The most recent Ofgem and ICIS forward delivery contract rates, which represent the wholesale prices that suppliers typically pay for the energy they provide to customers, are as follows:

• Wholesale gas is priced at around 135p per therm* (equivalent to approximately 29 kWh).
• Wholesale electricity is priced at around £120 per MWh* (equivalent to 1,000 kWh).

To gauge recent price drops, it’s essential to consider the day-ahead contract rates. These rates reflect fluctuations in the spot market, where energy is bought and sold to meet immediate demand, thus influencing the forward delivery contract rates.

Based on Ofgem and ICIS data, the latest day-ahead contract rates are:

• Wholesale gas is priced at around 84p per therm* (equivalent to approximately 29 kWh).
• Wholesale electricity is priced at around £90 per MWh* (equivalent to 1,000 kWh).

What are the most recent rates?

The rates your business pays for energy depend on factors such as your business size and type, energy usage patterns, and location.

Are energy prices continuing to increase?

Following a sharp rise in wholesale prices in December 2021, volatility persisted throughout 2022 and into 2023. However, since December 2022, there has been a general downward trend in prices. While this trend is ongoing, there’s no certainty it will persist, prompting us to continue monitoring the market to provide you with up-to-date information.

What factors contribute to energy price fluctuations?

Supply and demand dynamics significantly influence price volatility in the energy market. When energy supply is limited, prices typically rise, but they tend to decrease when supply levels improve. Similarly, high demand often leads to price increases, which then typically recede when demand subsides.

Over the past year, price volatility has been exacerbated by a combination of regular supply and demand factors and various global events. The COVID-19 pandemic and the conflict in Ukraine, in particular, have exerted significant pressure on energy prices.

To manage this volatility, energy suppliers often engage in futures trading to secure more predictable supply and pricing for consumers. However, the extreme volatility in recent times has made trading more challenging for suppliers, leading some to withdraw from the market temporarily or demand additional collateral to hedge against supply risks.

This volatility is reflected in the rates quoted for business energy, which have experienced substantial fluctuations. With no commercial price cap in place, out-of-contract gas rates have soared by an average of 180%, while out-of-contract electricity rates have increased by an average of 130% since August 2021.

The high rates quoted by suppliers, or their temporary withdrawal from the market, stem from record-high wholesale energy prices. Suppliers purchase energy from the wholesale market and pass on the increased costs to consumers, resulting in higher energy bills.

Switching to a fixed-rate energy deal can shield consumers from mid-contract price hikes, although rates may still rise upon renewal. However, the current unprecedented levels of volatility make it challenging to predict future price movements accurately.

These soaring energy prices contribute to inflationary pressures and raise concerns about an impending economic downturn, further underscoring the importance of managing energy costs. The government has implemented measures such as the Energy Bill Relief Scheme to assist businesses grappling with escalating energy expenses.

Why are energy prices so high? 

Supply and demand imbalances are driving up wholesale energy prices, which represent the amount paid by energy providers to generators for the gas and electricity supplied to businesses. These escalating wholesale costs are the primary drivers behind the energy price surges witnessed this year.

While the impacts of rising energy prices are felt globally, they stem from a variety of far-reaching and unexpected factors. The conflict in Ukraine is currently exacerbating an already significant issue with energy prices. Additionally, several other factors have contributed to inflating energy rates:

• Supply shortages: Gas shortages across Europe, resulting from an extended cold winter between 2020 and 2021, depleted natural gas storage.
• High demand: Strong demand for liquefied natural gas (LNG) from Asia has reduced LNG shipments to Europe.
• Closure of Nord Stream 1: The shutdown of this major pipeline, which transported gas from Russia to Germany, has significantly reduced gas supply to Europe, driving natural gas prices to their highest levels since early March.
• Infrastructure challenges: The delayed commencement of the Nord Stream 2 pipeline, an $11 billion project across the Baltic Sea, capable of delivering 55 billion cubic meters of gas annually from Russia to Europe, bypassing Ukraine. Despite its completion, Germany halted its operation in response to the Russian invasion. Additionally, fire damage at Freeport LNG’s Texas facility has restricted LNG imports to Europe, with the plant aiming to restore 85% capacity by late November.
• Post-lockdown resurgence: An uptick in demand following the easing of lockdown measures globally.

This issue is not confined to the UK alone but is a global concern. Nevertheless, the UK faces its unique set of challenges in addressing this issue.

What factors have contributed to the high energy prices in the UK?

We’re currently facing a global energy crisis, driving up prices for everyone. However, the UK is also grappling with several issues that are impacting supply, storage, and the prices consumers are paying for power:

• Lower renewable energy generation: Factors such as low winds and outages at some nuclear power stations have resulted in a higher reliance on gas for electricity generation. Even if you’re on a green energy deal providing 100% renewable electricity, your rates may still increase because the UK’s energy system links the price of renewable energy to gas prices.
• Fire at a National Grid site in Kent: This incident disrupted a power cable connecting England and France, used to import electricity from the continent. Full restoration is not expected until 2023.
• Low gas reserves: Compared to other European countries, the UK has minimal gas reserves, making it challenging to stockpile gas for future use. The UK’s gas storage capacity is equivalent to about 2% of its annual demand, much lower than other European countries.
• Insufficient government support: While the government’s £15 billion support package includes a £400 credit for households over six months starting from October, it may not have as significant an impact as measures implemented in other European countries. For example, France has capped electricity price increases at 4% until the year’s end.
• Issues with the energy market: Since 2021, 28 UK energy suppliers have gone bankrupt, largely due to an inability to cope with rising wholesale prices. When suppliers collapse, consumers often bear the cost through higher bills. For instance, when Bulb ceased trading, the government placed it into “special administration” instead of resorting to the “supplier of last resort” process. Initial estimates suggested this would cost £2.2 billion over two years, but recent figures from the Office for Budget Responsibility (OBR) indicate an additional £4.6 billion has been spent on managing the company, potentially adding up to £200 to annual household energy bills.

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