Why Are Energy Prices Going Up UK 2022?

Everything You Need to Know About UK Energy Prices and Why Energy Bills are Rising

UK Energy Price Increase Explained

2021 has been like no other for the energy market, with millions of home-owners seeing their bills soar and half of the UK’s suppliers collapsed.

Across the past six months, there has been a dramatic increase in the cost of wholesale energy, and this surge is only expected to continue. So much so that energy bills could rise as much as 50% in the spring of 2022 as the UK faces a “national crisis” over soaring wholesale gas and electricity prices.

This unprecedented surge in UK power prices has created an extremely difficult operating environment for every business in the industry. Even large providers, such as Bulb, have not been immune from the chaos, being placed into special administration by the Government.

EDF, the UK’s fourth largest energy supplier, said the situation was “critical” and the government must “act now to support energy customers”.

It is feared that prices will continue to rise into the New Year, as wholesale costs continue to increase across the board.

Why are Energy Prices Going Up?

So, what is causing UK energy prices to rise?

There is no straightforward answer to this question. A whole range of factors have contributed to the recent surge in UK gas and electricity prices. Some of these include:

High gas costs
Low wind energy generation
A fire at the electricity interconnection between Britain and France
A cold winter in Europe last year put pressure on supplies
Increased demand from Asia for liquefied natural gas

There are also a number of technical and geopolitical issues at play, which means many countries across Europe are grappling with the same problem.

The rising wholesale prices have already prompted Ofgem to announce a 12% increase to the level of its standard variable tariff energy price cap on 7 August 2021, taking the cap to its highest ever point of £1,277.

In turn, energy suppliers started to increase their standard variable prices to this new cap level, causing costs for consumers to soar.

What Does This Mean for Customers?

Although the energy market is rarely simple, the past few months have seen developments that have changed the way the market looks from a customer perspective.

Initially, when wholesale prices first started to climb, the UK’s price cap on energy bills prevented companies from immediately passing those costs onto their customers.

However, on 1 October 2021, industry regulator Ofgem set the price cap at a record £1,277. As a result of this price cap increase, many customers looking to switch their energy deal in the wake of the news found that their potential annual savings had reduced dramatically. In some cases, they might not have been able to save at all.

Unfortunately for home-owners, Ofgem is set to raise the cap significantly at the next review on 1 April 2022. This will result in consumers’ bills rising even further.

Should Customers Switch Energy Suppliers to Save Money?

A total of 25 energy suppliers have collapsed since August, representing half of those in the UK market. As a consequence, customers have been left with few options when switching providers.

The current advice to consumers is to stick with their current energy supplier.

The price cap is still in place for standard default tariff customers, which means they are often better off than those starting a new fixed tariff.

At present, suppliers are still unable to charge more than £1,277 – the level that was introduced at the last review in October.

While this is good news for default tariff customers, despite it being the highest price cap to date, it meant that some suppliers were paying more for the energy than they were charging, causing them to lose money.

As a result, customers on a long-term fixed deal are likely to be safest at the moment as their prices won’t change. However, those coming off a fixed deal may be better off joining a default tariff for now, rather than signing up to a new, more expensive fixed rate.

Customers coming off fixed deals onto new ones have found their estimated bills are increasing by hundreds of pounds, with many reporting that their annual bill is expected to reach over £2,000.

With the energy price cap expected to rise even further when reviewed in April 2022, with many experts expecting a rise of around £300, consumers should keep an eye on the adjustment and be prepared for further impact to their energy bills.

What’s Being Done About Rising UK Energy Prices?

The trade body Energy UK has called on the government to intervene to help cut the cost of energy bills.

“This is a system-wide issue now”, warned Emma Pinchbeck, the chief executive of Energy UK, speaking on BBC Radio 4’s Today programme. “We are asking for the Treasury in the UK to intervene as others have [in Europe],” Pinchbeck continued.

With only about a fifth of a consumer’s energy bill in the UK being in control of suppliers, it appears that the government are the only ones who can minimise the impact on home-owners. When it comes to other costs, such as VAT and green energy levies, the government has the power to reduce these and help domestic customers.

So, what is the government doing to cut energy bills?

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

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

However, it is yet to be seen as to whether the UK government will step up and make the changes needed to keep our energy bills down.

Other countries are implementing ways of controlling the surges in prices. Greece and France are considering subsidising energy bills, while Spain has put in place a windfall tax on power plant owners to lower consumer bills.

Will Energy Prices Drop in 2022?

Unfortunately, it is looking likely that these energy market problems will continue for some time.

Bills will likely still be high throughout the early part of 2022, and will continue to rise if the price cap increases as expected in April. It will not be reviewed again until October 2022.

Justina Miltienyte, energy policy expert at Uswitch, said: “Make no mistake, a lot of pain is coming for consumers when energy bills rise from April.”

“It brings into stark contrast how inadequate current support for the most vulnerable households is, making it critical that more is done to support those who need it most.”

Mark Bennet, energy expert at Energy Helpline, added: “The difficult truth is that we are still in the middle of this market volatility and can expect another half a dozen suppliers to go out of business within the next month or so, as the wholesale market continues to see record prices being set.”

Unfortunately, this does mean that much higher energy prices are coming for consumers in 2022. The current estimate for the next price cap is over £1,800 – an increase of around £550, due to come in April.

Given how turbulent the energy market has been in the last six months, it’s difficult to predict what will happen in the latter part of 2022, and while energy costs do usually come down during the warmer summer months, current trends suggest it won’t bring much respite to household bills next year.

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