The average household in England, Scotland and Wales will spend more than £3,000 a year on energy from October 2022, according to market researchers at Cornwall Insight.
Analysts at another firm, BFY Group, predict that annual bills could soar to nearly £4,000 – reaching £500 next January alone.
As recently as October 2021, a typical home was paying £1,370 a year. If the latest estimates materialise this winter, that means energy bills will have more than doubled in 12 months.
So, what’s behind this sudden increase? And is the regulator, Ofgem, to blame? Let’s take a look.
How does the price cap work?
Ofgem sets a “cap” which limits the maximum amount that 15 million domestic energy customers in Great Britain will pay. (Northern Ireland has its own regulator, which operates a broadly similar system on certain tariffs.)
The cap doesn’t cover people on fixed-term energy contracts as Ofgem says “these are more likely to be good value.”
The level of the cap is set every six months, and is revised up or down to “reflect the estimated costs to supply energy” over the next half-year.
Deciding what the price cap should be is a fine balancing act for the regulator.
Set it too low and energy providers could go bust because they can’t cover their costs, which reduces supply and drives up prices.
Set it too high and consumers could be plunged into poverty, and even face life-threatening cold. The World Health Organization cites one study that estimates cold homes could be responsible for 38,000 deaths a year in 11 European countries.
Ofgem says, “Capped prices only increase when the underlying cost of energy increases. Equally, if costs fall consumers should see a cut in their bills as suppliers are prevented from keeping prices higher for longer than necessary.”
Recent price cap rises are mainly the result of huge increases in the wholesale cost of gas – i.e. the price energy suppliers are paying to buy gas on the world market.
This is in turn driven by a “perfect storm” of problems, according to analysts at the Oxford Institute for Energy Studies, an independent research centre.
Their analysis describes how, in 2019, gas prices were actually expected to fall in the years ahead. Experts were anticipating more supplies of liquified natural gas (LNG) reaching Europe and only a small growth in demand for gas.
If those predictions had come true, we might now be seeing our energy bills come down. But, in reality, the opposite happened.
Demand for gas surged thanks to a cold winter in the northern hemisphere plus higher-than-expected gas use in China as the country recovered from Covid.
Meanwhile, Europe didn’t receive as much LNG as had been expected because demand from the rest of the world meant there was less to go around.
Supply couldn’t meet demand and prices shot up.
And since the Oxford Institute analysis was published in 2021, there’s been a further problem: Vladimir Putin’s invasion of Ukraine.
This has affected the EU directly, as Russia provided 40 per cent of the bloc’s gas in 2021. (Member countries have since announced measures to reduce their reliance on Russian imports, but the transition could take some time.)
You might think that we’d be insulated against this as, even before the war, only 4 per cent of our gas came from Russia. But the invasion has further driven up the global gas price, as traders worry that it might become harder to get hold of Russian supplies in future, which has turbocharged the rise in UK energy bills.
Has Ofgem failed?
So that’s why the wholesale price of gas has risen globally.
But firms and customers in Great Britain aren’t fending for themselves on the energy high seas – we have a regulator whose job is to “protect energy consumers, especially vulnerable people, by ensuring they are treated fairly and benefit from a cleaner, greener environment.”
The National Audit Office (NAO) said in June that, while “Ofgem could not have prevented the increase in wholesale prices in 2021 from significantly affecting” customers, “it did not do enough in the years that preceded it to ensure the energy supplier sector was resilient to external shocks.”
The watchdog believes that Ofgem allowed too many financially unstable suppliers to enter the market. When wholesale prices rose, those companies couldn’t cope with the massive hit to their bottom line and folded.
The House of Commons Business Committee made a similar observation last month. Its report “found overwhelming consensus that the collapse of 29 energy retailers between July 2021 and May 2022 could have been mitigated through robust regulation of suppliers.”
The collapse of those firms has pushed up prices for consumers. Citizens Advice estimates that customers who had to switch suppliers paid on average £30 more a month as a result. That’s on top of the hikes caused by wholesale gas prices.
Responding to the Committee report, Ofgem said: “No regulator can, or should, guarantee companies will not fail in a competitive market but we are working hard to reform the entire market, as well as closely scrutinising and holding individual energy suppliers to account, to further strengthen the regulatory regime.”
Energy bills in England, Scotland and Wales are soaring for several reasons.
The price that energy suppliers pay for gas on the world commodity markets has shot up since 2021 thanks to a “perfect storm” of lower-than-expected supply and higher-than-expected demand for gas.
This was exacerbated by Russia’s invasion of Ukraine earlier this year.
On top of that, British consumers who had to move from failed suppliers are paying £30 a month more because so many energy providers have gone out of business, according to Citizens Advice. Two major watchdogs say this reflects a failure by Ofgem: allowing firms to enter the market that weren’t financially stable enough to cope with hikes in global gas prices. Ofgem says it’s tightening its rules to reduce the risk of this happening in future.
Correction, 4 August 2022: The Oxford Institute for Energy Studies was formerly affiliated to the University of Oxford as a “Recognised Independent Centre”, but this is no longer the case.