Why are energy prices rising?

Several major issues are causing energy prices to rise for businesses putting us in the middle of an energy crisis. Here is everything you need to know.

Wholesale energy costs are currently at record levels with suppliers quoting the highest rates ever seen (that’s if they’re able to quote at all). Here’s why wholesale costs affect the price you pay for gas and electricity:

  • Suppliers buy energy from the wholesale market and then sell it to business energy customers.
  • Suppliers also include and factor in Third Party Non-Commodity Costs. These costs are levies for distribution, transportation, and green taxes. Find out more about these costs here.
  • Switching to a fixed-rate deal will protect you against any mid-contract price rises, but you should always check the terms and conditions. 

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

What does the remaining of 2022 look like for the energy market?

Wholesale energy costs have fluctuated over the last few months – after a steep increase in December 2021, prices have been particularly volatile in 2022. Although they have fallen and risen quite sharply, the overall trend is upwards. There’s nothing to suggest this will change any time soon, as Chris O’Shea, chief executive of British Gas owner Centrica, said: “The market suggests the high gas prices will be here for the next 18 months to two years“.

Why are wholesale energy prices so high? 

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: 

  • Gas shortages across Europe, caused by a prolonged cold winter between 2020 and 2021, drained natural gas storage. 
  • High demand for liquefied natural gas (LNG) from Asia has led to lower LNG shipments to Europe.    
  • Delays and complications to 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 (hence the complications). 
Why are UK energy prices so high?

As you can see, we’re in the middle of a global energy crisis, but to make matters worse, the UK is also suffering from the following problems: 

  • Low winds mean 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. 
  • Fire at a 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. This isn’t expected to be fully back up and running until 2023. 
  • 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.  
Has conflict in Ukraine impacted 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.  

How can my business navigate the energy crisis?

The only way business owners can currently shield themselves from any future price increases is to lock in their energy renewal rates as soon as possible at a budget secured contract you are happy with.

Speak with an energy expert about our Utility Health Check who can assess your requirements and discuss what options are available to your business.