Why Are Energy Prices Rising And What’s Being Done?

Energy prices have shot up over the last year, pushing the government to consider issuing rescue loans to save those suppliers in crisis.

Industry group Oil & Gas UK said wholesale prices for natural gas had gone up by 250% since January – and there has been a 70% rise since August.

Power prices have shot up to £2,500 per megawatt-hour for spot electricity, compared to the typical baseload of £40 per megawatt-hour last year.

The climb in prices stems from a shortage of both electricity and gas – but what exactly has brought on this crisis?

Reduced electricity from France

There was a major fire at a National Grid site near Ashford in Kent last week, meaning the main power cable reaching to Europe had to be shut down.

The electricity the UK receives from Belgium, Norway and the Netherlands was subsequently cut off and the cable is not expected to be brought back in its full capacity until March next year.

Wind turbines have been less effective

Calm weather means wind speeds have not been at high, so wind turbines have not been able to harness enough energy.

The UK has not been this windless since 1961, and conditions are only expected to worsen as the temperature drops for winter.

A windfarm in Burnley

Increased demand due to more extreme weather

Summer heatwaves across Europe triggered a rise in air conditioning and refrigeration demands, draining the backup energy supplies.

Last year’s exceptionally cold winter also left gas supplies depleted in the UK.

Nuclear reactor outages

Half of the UK’s electricity comes from gas-fired power plants, and a series of nuclear reactor outages has triggered a shutdown for some suppliers.

Many coal sites have also been decommissioned in the bid to favour green energy, meaning Britain’s backup supply is running thin.

Global gas race

Russia has limited its exports to Europe due to a recent increase in demands within its own country.

Prices have also risen due to increased competition with Asia, as the continent has faced colder weather in recent months. An increase in post-lockdown activity has put more pressure on energy demands too.

What does this mean for energy bills?

Small suppliers could face bankruptcy as they struggle to meet their low-price promises to consumers.

Winter energy bills are predicted to reach the highest levels of the last 10 years and half a million additional people are expected to go into fuel poverty.

Energy regulator Ofgem will make sure that households will continue to be supplied if an energy firm collapses as prices rise.

The regulators predicted in August that default energy tariffs would rise by 12.5% after the rise of energy market prices between February and July 2021, while fixed deals are expected to shoot up too.

Ofgem review the energy market price caps every six months – last month, it announced an increase of £139 to the cap to respond to changes in supplies. This climb is expected to hit 15 million people in the UK.

More than half a million people already need a new supplier, as five firms collapsed over the last five weeks.

Energy experts at Barina Partners believe just 10 energy suppliers out of the 70 in Britain at the beginning of the year are expected to survive until the end of winter.

What are governments doing?

Business secretary Kwasi Kwarteng has held emergency meetings with key representatives from the energy industry over a potential rescue loan but nothing has been put in place yet.

Prime minister Boris Johnson has promised the issue is “temporary” and is “very confident” the problem the market will be “very very swift” in fixing it.

The UK is expected to rely on the energy price cap to control surges in prices.

Greece and France are considering subsiding energy bills, while Spain puts in place a windfall tax on power plant owners to lower consumer bills.

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