We’ve all been feeling the pinch this winter with the cost of living crisis and rising energy costs. According to the Office for National Statistics’ Cost of Living Insights dated 27th February 2023, electricity prices in the UK rose by 66.7% and gas prices by 129.4% in the 12 months to January 2023, causing many people to change their behaviour over the winter months - almost 6 in 10 adults are using less fuel in their homes because of the rising cost of living.
You might have already heard that on Monday 27 February 2023, the energy regulator Ofgem announced the latest update to the energy price cap for dual fuel households.
The energy price cap was introduced by the government in January 2019, and is regularly reviewed by Ofgem. It sets a maximum that suppliers can charge per unit of energy.
The good news is that the energy price cap is now set at £3,280 from April 2023. This is almost a £1,000 drop from the previous level of £4,279, but still way higher than in September 2021 when the price cap was £1,277 a year – a whopping £2,003 less than it will be in April this year.
So, does this mean that gas and electric bills are set to go down? Unfortunately this is not the case – at least for some time. In fact, it's the opposite. Bills are set to rise over the short term. This is despite the good news that wholesale gas prices for 2023–24 are down by more than 70 per cent from their peak in August last year. In fact they’ve slumped to their lowest level in 18 months. In this blog, we’re going to be looking at why this isn’t being reflected in the bills we will be paying.
Why are energy bills still so expensive?
There are many factors that have contributed to the recent energy crisis. Amongst other causes, the pandemic saw decreased demand when everyone was in lockdown, but when restrictions were lifted, demand increased significantly and prices rose due to the increased demand and the fact that adjusting energy supplies quickly is not an easy process. Then there’s the war in Ukraine and it's affect on energy prices. Many countries placed sanctions against Russia after it invaded Ukraine, resulting in less gas to go around. Again, this resulted in rising prices.
The price of electricity is in part driven by the price of gas, so both electricity and gas bills are based on wholesale prices, but not in real time. Wholesale energy costs fluctuate, and to get around this, almost all energy companies purchase their gas and electricity ahead of when it’s needed – a practice known as ‘hedging’. They buy in bulk at those prices to meet customer demand for a set period of time. They can buy months, or even years ahead. This ensures security of supply and that they’ll always have a large enough supply to cope with demand, and be prepared for cold weather which causes demand to shoot up as everyone uses more fuel.
So, even though energy suppliers can now buy cheaper fuel, they first need to sell what they’ve already bought at a more expensive wholesale price. As we’ve already said, it’s quite normal for companies to buy electricity and gas several months (or even years) ahead of the time it is sold on to customers to avoid running out when customer's need it.
As a result, the current lower wholesale price for fuel will not be immediately reflected in the cost of energy to customers. Instead, price reductions may take months to trickle down to your heating bills.
Contributing factors to high prices
In addition to wholesale prices, there are other external factors that can’t be ignored when considering energy prices. These can include rising transport and distribution costs which can further delay savings being passed onto customers, operating costs including sending bills and providing customer service, network costs for providing and running the infrastructure of supplying the UK’s homes and businesses via pylons, gas pipelines and electricity cables, and even the cost of bailing out energy firms that have failed.
So, what does this mean for your bills? Well, rest assured that your heating bills will fall, just not straight away. Unfortunately for the short term, bills are going to go up to reflect the more expensive fuel that was bought a few months ago. We realise this is not just frustrating, but also an added burden when coupled with rising costs elsewhere due to the cost of living crisis.
However, it's important to remember that energy companies aren’t solely responsible for the cost of energy. There are a variety of factors that can impact the final cost, and energy companies are just one piece of the puzzle.
In conclusion, while falling wholesale gas prices will undoubtedly be good news for consumers in the long term leading to reduced energy bills, it's important to remember that the savings may not be immediately reflected and will take time.
So, when can we expect energy bills to fall?
Many experts and analysts are predicting that bills should start to fall from July 2023, and whilst this doesn’t mean cheap energy, it will be cheaper than it has been in the last year or so. Ofgem CEO, Jonathan Brearley, said: ‘If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower’.
What help is available?
It is worth noting that at the end of February 2023, the Government announced for those people who live off-grid and use alternative fuels such as heating oil or liquified petroleum gas (LPG) and who didn’t automatically get the Alternative Fuel Payment (AFP), a portal is now open for householders to apply. For more information, read our recent blog announcing the secure online portal for AFP.
In addition, the Government has confirmed that the Energy Price Guarantee will carry on until March 2024. So, if prices remain high, it will provide vital support by lowering the amount you have to pay for energy under the cap. And even though the £400 payment through the Energy Bill Support Scheme is to end, vulnerable customers will receive a cost-of-living payment in Spring 2023.
We hope this helps explain why energy bills will remain high in the short term. As always we highly recommend saving as much energy as possible by applying quick and easy saving techniques throughout your home. A number of small changes can make a big difference to your yearly heating bill. We’ve compiled our top tips on how to reduce heat loss at home in our blog. Please take 5-minutes to look through and see what energy-saving changes you can make.
And we're here to help in other ways too. We can help you budget with our Flexi Saver Plan. It helps ease the financial burden of large heating oil bills by making them easier to pay and is flexible so you can save as much or as little as you want each month towards your next heating oil bill. To find out more, just get in touch on 01423 770 666 or get an alternative fuel quote.