Why are the energy costs of wholesale so high? It results from a string of coincidences, some affecting the entire world and others only in the UK.
While we are all impacted by growing energy costs at home and work, it is a global problem brought on by several unanticipated and far-reaching factors.
Energy prices were always a major concern, but they have become much worse as a result of several factors, including the situation in Ukraine (more on that below) and the following ones:
- A lengthy, bitter winter between 2020 and 2021 led to gas shortages throughout Europe. Natural gas storage was depleted.
- Lower LNG supplies to Europe are the result of the high demand for LNG in Asia.
- Russia has totally shut down the Nord Stream 1 pipeline, having initially restricted its capacity to barely 20%, which has resulted in a European supply scarcity and an increase in costs.
- The delay of the Nord Stream 2 pipeline, an $11 billion connection across the Baltic Sea with the ability to transmit 55 billion cubic meters of gas every year straight from Russia to Europe without going via Ukraine. Despite being finished, the pipeline was not put into operation because of the Russian invasion by Germany.
- Demand is rising as global lockdown limits loosened.
We are experiencing a worldwide energy crisis, as you can see, but to make this situation worse, the UK is also dealing with the following issues:
Lower output of renewable energy
Low wind speeds combined with occasional nuclear power plant outages implies that a larger portion of our electricity is produced using gas.
Even if your green energy contract guarantees that all of the electricity you use comes from renewable sources, your prices will rise.
This is due to the way the energy system in the UK is set up, which means that the cost of renewable energy is directly correlated to the cost of gas. As a result, when gas prices rise, the cost of renewable energy also rises.
Fire at a National Grid facility in Kent
During a fire at a National Grid facility in Kent, a power connection between England and France—used to import electricity from the continent—was cut off. It won’t likely be completely operational again until 2023.
Low gas reserves
The UK has among the smallest gas reserves in Europe, which leaves little room for gas storage. In comparison to other European nations, where capacity may reach up to 37%, the UK’s capacity only accounts for about 2% of its yearly consumption.
Inadequate government assistance
Even though the government’s £15 billion assistance plan will see people credited with £400 spanning six months beginning in October, this will not have as great of an effect as measures made in other European nations. For example, France has restricted annual power price rises to 4%.
Energy market problems
Since 2021, 28 UK energy companies have declared bankruptcy.
This is mostly attributable to the fact that many of them had business models that couldn’t handle a rise in wholesale costs. Additionally, customers contribute to cost absorption by paying more when providers fail.
Why are the costs of renewable energy so high?
If you have a green energy plan that provides just renewable energy, you could be perplexed as to why your costs are rising when there is no gas involved in its production.
The functioning of the UK’s energy grid is to blame for everything. Although over half of the UK’s total energy production in the initial three months of this year came from renewable sources, we still depend on gas-powered facilities to provide a portion of our electricity.
And from there, the problems with price stem. A method known as “marginal cost pricing” is used to determine energy costs.
This essentially implies that the price of all energy sources, including renewables, is determined using the most costly form of energy.
Even if you have a plan that provides 100% renewable energy, the cost of your electricity is determined not by the price of solar or wind power output but rather by the cost of the last source that was utilized to satisfy demand.
In the UK, gas-powered stations are utilized to supplement peak energy demand, and all electricity prices are determined using the price of gas-powered electricity.
Consequently, you can be sure that power rates will increase quickly when gas prices do.
The system will be examined until October 22, but one aspect of the Prime Minister’s energy cap announcement—that renewable and nuclear electricity will be switched from marginal pricing to Contracts for Difference—might have slipped by accident.
As a result, the price of energy produced by nuclear and renewable sources won’t be determined by gas costs. Rather, generators will get a set, beforehand agreed-upon price for the low-carbon power they generate during the duration of the contract.
When customers migrate to less expensive, clean energy sources, the decoupling of expensive global fossil fuel prices from electricity generated by less expensive renewables should ensure they pay less.
What is the energy price cap?
When your switching period begins, it’s crucial to conduct a Business Energy Comparison.
The energy price cap was implemented in 2019 to restrict how much energy providers might charge residential consumers on basic variable rate plans (SVTs).
The UK’s energy regulator, Ofgem, has declared that the energy price cap would climb by 80% as of October 1 of this year.
This translates to an increase in expenditures of £3,550 per year for the typical household paying their utility costs by Direct Debit, from $1,969 annually. According to the most recent report, the price increase from the year’s beginning has been 178%.
The average cost for households using prepayment meters was expected to increase by 79%, from £2,020 to £3,615. A 79% rise, from £2,100 to £3,770, would be felt by anybody paying their account in full.
However, the “energy price guarantee” has taken its place. For the following two years, home energy customers will be subject to a price ceiling set at the lower amount of £2,500 per year.
It is important to note that the cap establishes the rates that providers may bill for each unit of energy as well as the standing fee (which has increased in some regions), but it does not imply that there is a ceiling on the amount that consumers may pay. The average monthly cost for a household on a regular variable rate plan with their supplier is £2,500.
In other words, your expenses will increase as you consume more gas and electricity.
If you operate a barbershop or restaurant instead of working from home and from a set location, for example, you won’t be protected by a price cap.
Even though your company will have a customized corporate gas and electricity plan, you could discover that your commercial provider has raised prices at your next renewal to account for rising expenses.