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Gas is traded in international markets, so companies that buy and sell gas are subject to global prices. The price of wholesale gas in Europe rocketed to unprecedented levels in 2022, peaking at levels 20 times higher than at the start of 2021. This trend pre-dated the invasion of Ukraine, but the uncertainty of the war and disruption to supplies from Russia led to even higher and more volatile gas prices throughout 2022. 

In the UK, we are very dependent on gas for our heating (used in approximately 85% of our homes) and gas also contributes around 40% of our electricity mix. 

It’s important to note that bills are still substantially higher than historic levels and it’s likely a lot of people will still need support with their energy bills. You can find customer support on this page here.

Gas prices have started to come down from their record levels. They remain, however, more than double the long-term average of prices seen before the crisis and are likely to be elevated for some time. There is no guarantee that prices will continue to fall and there are a range of global factors that could see gas become more expensive again. Equally, there is always a time lag between movements in wholesale prices and individuals’ energy bills.   

We generate a lot of electricity through gas-fuelled power stations – roughly about 40%. So for now the price of gas remains a major factor in the price of electricity.  However, as renewable energy forms more and more of our electricity mix, the percentage of gas will reduce and this will lower costs, as electricity from wind and solar is much cheaper than gas.

In the first instance, you should always let your supplier know if you are struggling to pay, as they may be able to provide additional support, or help agree a payment plan. 

With so many people needing support, call volumes are extremely high right now so where possible people should take advantage of the range of methods to get in touch.

All major retail suppliers have their own funds, independently managed by fund administrators or in partnership with debt advice charities like Citizens Advice.

The Government has a range of additional support in place to help people with the cost-of-living, so it is worth visiting their website to check if you are eligible.

A bill is made up of the cost of buying energy (wholesale – the biggest component) and other costs suppliers have to pay such as network charges and policy costs, in addition to an allowance for operating costs etc.

As a result, suppliers have no direct control over most of the costs that make up a bill and much of which is collected on behalf of other parties.

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The price cap is the maximum amount an energy supplier can charge their customers on default tariffs. Ofgem, the energy regulator, updates the cap every three months basing it on the various costs that suppliers face whilst ensuring that customers pay a fair price for their energy. 

It is important suppliers are able to recoup costs otherwise the market is simply not sustainable, however it is set at a level where suppliers make little or no profit. Even before the gas price crisis, most suppliers were making losses on domestic accounts. 

It is not an absolute cap, so what you pay depends on how much you use and there can also be variations between different parts of the country. 

Ofgem estimates how much a typical dual fuel customer paying by direct debit would pay and uses this annual figure so it’s easier to understand and compare year on year. 

From 1 April 2024, the cap is set at £1,690 a year, and from 1 July to 30 September 2024, this will fall to £1,568 a year.

For a further breakdown of the price cap, visit Ofgem’s website.

If you’re on a renewable tariff, then your supplier has committed to match the amount of energy you use with the amount of renewable power they purchase for you, but the actual electrons into your home are from the mix that’s on the grid. Your supplier has to purchase power from the grid and what’s on there at the time – which can vary markedly depending on the time of day or the year or the weather etc.

As renewables form a larger part of the UK’s electricity mix, we will start to see the benefits of this cheaper power. Additionally, many people on renewable tariffs still use gas for heating – for which there are currently limited low-carbon sources.  

The residential energy supply sector runs at a loss, with most suppliers not making any profit from their customers. This has been the case since before the pandemic. 

Companies cannot afford to supply electricity and gas to their customers for less than they have paid for it, so the cap has to reflect the true cost of energy. 

Many energy suppliers have failed since the high prices began because they were unable to cover their costs. This leads to higher bills for all of us because the market has to absorb the costs of taking on customers from the suppliers that exit the market. 

Most retail energy companies that supply electricity and gas to households do not make a profit and often lose money, which is why over 30 suppliers have gone out of business since 2021. This has been the case since before the Covid-19 pandemic. When companies declare their finances, it is usually reflective of their wider business activities across the energy industry.  

Energy companies need financial stability to ensure they can continue to generate and supply our energy, which is an essential service.

This is a key requirement of the price cap which sets out how costs can be recovered from customer bills on the default tariff. It provides an allowable supplier profit margin, also known as Earnings Before Interest Tax (EBIT). If suppliers are unable to recoup the costs they face, they are likely to be less able to invest in improving customer services, innovating, and delivering new products and services.   

Ofgem appoints a new supplier to take on the customers through its Supplier of Last Resort (SOLR) process so there is no interruption to customers’ supply, and no need for the customer to act. However, this process does impose costs on other suppliers and customers.

If the failed company is too large to be taken on by another supplier, it will go into the Special Administration Regime (SAR). This means that administrators and Government will take on the operation of the company including its liabilities and future energy needs to ensure that customers aren’t left without.

The energy market is not like a normal market, in that if companies exit the market the accounts of their customers must be picked up by another supplier, otherwise people would be left with no energy. Whichever supplier takes on the customers from a failed supplier has to purchase the energy they need to supply them at whatever the cost of energy is at that time.

In addition, the new supplier has to honour things like credit balances and the failed supplier may have left other liabilities like payments to industry-wide schemes. 

Standing charges are costs which are paid irrespective of how much energy you use. These are to cover fixed costs that suppliers have to pay such as network charges, which is the cost of transporting the gas and electricity to your home. This is collected by energy suppliers through bills and then passed onto the companies that transport gas and electricity to your home (energy network companies). 

Network charges vary between regions – reflecting the different costs of transporting energy in different parts of GB. Suppliers have scope as to how they allocate costs between standing charges and unit rates but put together they cannot exceed the price cap. This explains why standing charges vary between suppliers. If the amount collected through standing charges was reduced then the unit cost would be higher and vice versa.         

The energy regulator, Ofgem, calculates Typical Domestic Consumption Values (TDCVs) which are used by industry to provide a method to easily compare figures on energy usage. On 1 October, the updated Typical Domestic Consumption Values (TDCVs) will reflect the falling trend in the consumption of electricity and gas. 

From 1 July – 30 September 2024, the price cap level for a typical household is set at £1,568. 

Check out this explainer to learn everything you need to know about TDCVs