Key Points
- The spot price of gas has fallen from record high levels and is now similar to what it was around 18 months ago, which is still high by historic standards. Energy bills are highly unlikely to immediately respond to this swing in the market.
- To protect households and businesses from market volatility, energy companies ‘hedge’ by buying gas and electricity in advance of when it is needed.
- This means that energy bills today reflect the market’s expectations for price from many months and years ago and won’t reflect today’s prices.
- Although gas prices may be low today, we have already seen prices rise significantly to secure gas for this winter (when people need it most).
- Unless the price of gas stays cheap for a long period over winter, energy prices are likely to remain much higher than normal into 2023.
- The fall in gas prices is likely to be driven by mainly temporary factors, including an unseasonably warm autumn, nearly full storage facilities and limited capacity at ports for unloading liquified natural gas from ships.
Why does the price of gas affect my electricity bill?
Electricity prices are currently set by the cost of the last generating unit to be turned on to meet demand – which is mostly a gas power plant with high marginal costs. Renewable energy is around nine times cheaper than gas, and the price cap is already seeing reductions thanks to newer renewable projects.
The energy industry plans to invest £100bn over the course of this decade in new energy sources, and Energy UK has put forward ideas to Government to ensure consumers benefit from cheap, clean homegrown low carbon electricity.
What is energy market hedging and why do companies do it?
Hedging is a strategy most energy suppliers use to reduce price risks and Ofgem assumes this in the price cap that limits the amount retail suppliers can charge. Suppliers will buy a certain amount of energy in advance to ‘lock in’ the price and to reduce the risk of adverse price movements.
Why does this influence the cost of energy bills?
Suppliers’ ability to hedge brings down the risk and therefore the cost of buying electricity and gas, which links through to the prices paid by households and businesses. If suppliers didn’t hedge, bills would have been even more volatile and much higher due to the recent rises in
gas prices on the international market. This does mean though that today’s prices for gas may not necessarily be reflected in people’s energy bills.
When will we see cheaper bills?
The Government’s Energy Price Guarantee is in place until March 2023, and limits the amount homes pay for their energy, so that the annual bill of an average household paying by direct debit is £2,500.
The amount people will be charged will vary depending on how much they use and how they pay. Energy prices are likely to remain much higher than normal into 2023 and Energy UK is working with its members and Government on what support will be available post-March 2023.
Ofgem, the energy regulator, has moved from six-monthly price cap calculations, to every three months, so that when there is a sustained fall in the price of gas, this will be reflected sooner in people’s bills.
Where can people get support if they are struggling to pay their bills?
Energy UK has produced a detailed FAQ for households and businesses which can be found here and wider support for winter found here.
What about businesses?
The Energy Bill Relief Scheme (EBRS) will provide a discount on the business’ unit price for gas and electricity. It applies to fixed contracts agreed on or after 1 December 2021, deemed, variable and flexible tariffs and contracts. It applies to energy usage from 1 October 2022 to
31 March 2023, running for an initial six-month period for all non-domestic energy users.
Businesses may be able to access additional support and help to reduce energy useage include:
- the Industrial Energy Transformation Fund (IETF), which consists of £315 million live grant funding that supports manufacturers with high energy use to cut their energy bills and carbon emissions by investing in energy efficiency and low-carbon technologies
- a number of advice and support schemes that businesses may be eligible for, to help to improve the energy performance of buildings and processes and lower their energy bills. Search for local schemes that provide advice and grants
- the UK Business Climate Hub which provides practical steps on cutting emissions and saving money. If businesses are based in England, they may also be able to access support via local Growth Hubs, who they can get in touch with to find out more
Downloads
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Energy UK explainer – Gas is cheap right now, so why aren’t bills?
Type: PDF (160 KB)
