Why are energy prices going up?

What are the main factors that have led to increasing energy prices in the UK in 2022... and beyond? Here we explain all and what you can do.

Inflation is the broad increase in the cost of services and goods in the economy.

Some inflation is good, as it allows the economy to grow.

Too much, however, creates a cost-of-living crisis. From 2012 to 2021, the UK’s inflation rate ranged from 0.37% to 2.57%.

However, this year, the Consumer Price Index surpassed 10% in July.

One area that has been particularly affected by inflation is energy.

But is that all there is to it? And why exactly have energy prices inflated, to begin with?

Let’s find out...

Main Reasons for Increasing Energy Prices

There are two primary factors that have shaped the energy price crisis.

The Pandemic

The Covid-19 pandemic initially resulted in a dramatic reduction in oil and gas demand.

In fact, in April 2020, oil prices even went negative! In other words, traders were being paid money to house oil barrels. But times have certainly changed since then.

Demand steadily increased as the pandemic wound down, and ultimately, suppliers were not able to keep pace with the speed of change in demand.

Ultimately, this led to increasing energy prices.

The Conflict in Ukraine

Things have gotten worse since the Russian invasion of Ukraine in February of this year.

Some people are surprised considering the fact that we only import 3% of our natural gas from Russia.

So why has this impacted energy costs so much?

Well, if Europe buys less Russian oil, it will naturally have to replace it with imports from another country — for instance, the Saudi Arabia-led Organization of the Petroleum Exporting Countries (OPEC).

That increase in demand for OPEC gas and oil has resulted in a global price surge.

How This Will Affect Your Bills

From July 2021 to July of this year, gas prices almost doubled, while electricity prices increased by 54%.

And, unfortunately, as of September 2022, prices are set to increase further.

In order to understand where prices are headed, we should consider the energy price cap.

The price cap limits what suppliers can charge for a given unit of gas or electricity and the standing charge.

It doesn’t set a limit to the total amount you pay, however. The energy price cap was introduced by Ofgem in January 2019.

It’s easier to understand the price cap in the context of average energy bills (meaning both electricity and gas).

In other words, the price cap of the average household is combined with the average total cost of a household’s annual energy usage.

Based on the above measure, the average household was paying around £1,100 through most of 2019. This figure stood at £1,277 in August 2021 before shooting up to £1,971 in April 2022.

In the months since, however, things have continued to escalate. The energy price cap surpassed £3,500 in August and we haven’t even seen the worst of it yet.

By January 2023, the average price cap will likely surpass £4,200 in yearly energy costs, according to management consultancy Cornwall Insight.

But is there an end in sight? Well, the consultancy predicts that the average household will have an annual bill of a little over £4,400 by April 2023 before finally seeing energy prices decline.

How much energy prices could decline through summer, autumn, and winter of 2023 is very much up in the air.

We simply don’t know at this stage how 2023 will unfold in full.

However, if Cornwall Insight’s forecasts are correct, we’ll see the worst of this crisis before summer ‘23.

Here’s another way of visualizing how things are changing with the price of a kWh of electricity:

17.2p for October 2020 to March 2021
20.8p for October 2021 to March 2022
51.9p from October 2022

As for gas, here are past and future prices per kWh of energy:

3.0p for October 2020 to March 2021
3.3p for April to September 2021
4.1p for October 2021 to March 2022
7.4p as of September 2022
14.8p from October 2022

What Support is available for Households?

Of course, the energy price cap is the first line of defence against rising gas and electricity prices.

However, considering the need to raise the price cap, this won’t be of any meaningful solace for consumers.

But the government has also announced a £37 million cost of living support package which will provide a £400 energy bills discount for all households in England, Scotland, and Wales.

This four-hundred-pound discount will be paid to households over a six-month period from October 2022 to April 2023.

You do not need to apply for the £400 discount. This will be done automatically through your energy supplier.

Households with greater needs will be eligible for additional support. Additional supports for those most in need, include:

£650 one-off cost of living payment (about 8 million households will be eligible)
£300 one-off pensioner cost of living payment (around 8 million pensioner households will be eligible)
£150 one-off disability cost of living payment (approximately 6 million people will be eligible)

More details on the £400 energy discount and related supports may be found on Gov.uk. More measures may also be announced.

Energy Help Guides:

Ways to Keep Your Energy Prices Down

Aside from government support, there is a range of practical ways to keep your energy bills down, they include the following:

General Ways of Lowering Your Gas and Electricity Usage

Here are some approaches to bring your energy bills down:

Run your washing machine at 30° and ensure it's fully loaded.
Only use your dishwasher when it’s full.
Turn off plug sockets when the appliance they’re attached to is not being used.
Pull over your curtains in the evening time to insulate your home better. However, you don’t want to hang curtains over radiators as this leads to heat being funnelled out your window.
Dry your clothes on the washing line where possible.
Ensure your fridge temperature lands between 3°C and 5°C. Ideally, your freezer should be around -18°C, or whichever temperature the manufacturer recommends.
Only fill the kettle up as much as you need at any given time.
Take showers instead of baths, make them shorter, and if you use a power shower, dial down the pressure a bit.

Read our complete guide on reducing your energy bills if you want a list of actionable steps with estimated savings in pounds and pence.

Recommended reading:

Electric Water Heating Tips

Most homeowners use a gas boiler to heat their homes and for the supply of hot water.

However, if you use an electricity-based heater, like an immersion heater, there are steps you can take to reduce your electricity bills by using your immersion heater in the right ways or even making adjustments.

In most cases, you only want to run your immersion heater for an hour or two a day depending on your needs.

If you use an electric shower, less than two hours of usage should suffice to cover your hot water needs for the day.

Next, you should consider whether you are paying more than you should be.

If you are on an economy 7 or economy 10 tariff, the price of electricity is typically much cheaper during off-peak hours, so it’s helpful to try and limit your use to this window.

This is particularly helpful if your home uses an immersion heater to heat water. You can easily set your thermostat timer to reap the rewards of certain energy tariffs.

For example, customers on the Economy 7 tariff can set their timer to only switch the heater on during off-peak hours.

You can also insulate your immersion heater; in which case your water will stay hot for several hours after it has been turned off.

An insulating jacket that is no less than 80mm in thickness. Also, the hot water pipes should come with foam insulation.

You can easily find out the tariff you are on by asking your energy provider.

If your immersion heater doesn’t meet these expectations, you could hire a professional to add these for you, with a total supply cost of around £30 to £40.

Switch Energy Suppliers

Due to the current energy crisis, there isn't as much opportunity to change your current energy tariff to a more competitive deal, but it may still be worth checking.

However, many energy suppliers have closed down and many others continue to refuse to take on new customers at present.

In usual circumstances comparing energy, quotes can be one of the quickest ways to save money on both your gas and electricity bills.

But you also need to be cautious here since energy prices are changing so fast.

Please also note that if your energy supplier were to go bust, you don’t want to switch suppliers or tariffs prior to your account transferring to your new provider.

Long-term solutions

For most people, long-term solutions won’t be of much help right now.

For instance, it costs around £100 per square metre to insulate a property.

However, some long-term solutions are viable thanks to buy now, pay later payment options. For instance, it’s possible to purchase a boiler on finance.

So, if you have an old, inefficient gas boiler that’s possibly on the way out, this option may interest you.

According to the Energy Saving Trust making this upgrade has a significant advantage:

By trading your old boiler in for a modern boiler, you could save around £340 and a whopping 1,500kg of carbon emissions a year.

In many cases, you could pay for the cost of the boiler + installation (around £1,750 to £3,800) over two years and sometimes even longer.

The good news is that zero interest options also exist. But let’s say you do have an interest rate and it comes to 10%.

If you were to pay for a boiler + installation with a 10% interest rate over twenty-four months, you’d probably pay somewhere in the region of £73 to £159 per month.

Moreover, the repayment time frame is also key. If you can secure a deal where you pay for a boiler and its installation over five or even ten years, you’ll probably save quite a bit in the short-term thanks to reduced energy bills.

Also, while most boiler finance deals require a credit check, you’ll likely qualify to buy now, pay later so long as you don’t have any recent CCJs or IVAs in the past five years.

In other words, you may still qualify with bad credit, once your credit history has been solid in the past half-decade or so.