Insights / Why are energy prices going up?

Why are energy prices going up?

21st September 2022

Wholesale energy prices are higher than they’ve been in decades, and it’s affecting our energy bills.

Multiple factors are playing a part in this unprecedented price spike. Read on to find out what’s causing it, and what to do if you’re concerned.

Why are energy prices going up? - Hero

Increase in demand

At the start of 2021 when Covid-19 restrictions lifted, demand for gas increased from its low point in 2020. Demand was further increased by the global cold snaps over the same period.

The cold weather continued into the months of April and May. This restricted the ability to refill storage facilities across Europe, leaving them at historically low levels. It’s important that we store gas for efficient running of the energy market, with gas storage primarily providing an important source of flexibility that’s needed to balance supply and demand.

Increase in energy demand graphic

The war in Ukraine

As we moved through 2021, geopolitical tensions began to increase and the threat of conflict between Russia and Ukraine emerged. Russian flows into Europe were significantly lower year on year, which again restricted the ability to fill European storage.

Russia is a significant player in the global gas market. It supplies around 30-40% of European gas, with reliance much higher in some southern and eastern countries.

When the war began, many countries started taking steps to reduce their reliance on Russian gas. But there’s limited alternative sources and insufficient capacity to completely replace Russian gas. The EU is also aiming to cut gas demand by 15% between August 2022 and March 2023.

Russian gas flows have continued to decrease during 2022 and as a result, prices have continued to rise.

Why are energy prices going up? - Graphic 2

How are gas and electricity prices linked?

About a third of Britain’s electricity is generated by burning natural gas. While the UK is trying to use renewable electricity where it can – Drax generates around 12% of the UK’s electricity through sustainable biomass – we are still reliant on gas.

What’s more, gas will often set the price for the rest of the energy mix used. Every day, energy technologies are brought online to meet electricity demand. This process happens every half hour, and renewables are always the first choice as they’re cheapest to run. Non-renewable power sources then ‘top up’ the demand for that half hour period.

In our power system, electricity prices are decided based on the cost of the last technology needed to meet that half hour of demand, which is called the ‘marginal’ generation.

As gas is often the 'marginal' generation, gas generators set electricity prices in a lot of periods within the UK meaning movements in gas prices are reflected in electricity prices.

Cold seasonal weather

The arrival of winter brings additional risks. Consumption will jump as businesses and households consume energy to combat the cold.

If we have any particularly cold spells then energy use increases even further. Which puts more demand on the system, and leads to higher prices. So, at present, the uncertainties over winter temperatures, alongside concerns about Russia, are putting even more pressure on prices.

Increasing third party costs

Only part of the price you pay for energy goes towards the electricity or gas you use. The rest is for ‘non energy costs’.

Some of these costs are increasing because of inflation. Some to cover the cost of investing in the networks that transport the energy. Some are increasing because they’re linked to wholesale energy prices.

This means that both parts of energy bills – the wholesale energy price and the costs for supporting services – are increasing.

What does this mean for my business?

If your business has a fixed price electricity contract, you may not be immediately affected by the exceptional changes to energy markets. But, all businesses are likely to see price increases soon, as energy and third party costs increase rapidly.

If your business has a flexible contract, your wholesale electricity and third party costs are likely already affected. The extent of the impact will depend upon your hedging strategy.

Being energy efficient is the best way to cut costs

Reducing energy use is always the best way to lower your bills and help the environment.

Heating

Heating accounts for 40% of energy use in non-domestic buildings. Top up insulation, put thermostats on timers and fit draught proofing.

LED lighting

Switch to LED lighting. Depending on what bulbs you use, you could save between £4-13 per bulb replaced by LED lighting per year.

Drax customers can get 10% off energy efficient lighting through one of our partners.

Smart meter

Get a smart meter. They’re installed at no extra cost to you and can tell you exactly how much energy you’re using, and when. It’s the fastest way to see if you have any energy ‘leaks’ and to tell which appliances and operations are most energy intensive.

I’m concerned about my energy bills

With many businesses still recovering from the financial impact of Covid-19, this is likely to be a difficult time. Our teams want to help.

Contact us

If you’re at all worried about managing your energy payments, please contact us. We’ll work with you to come up with a management plan. The sooner you contact us, the better we’ll be able to help.

See if you’re eligible for Government support

The Government has announced further details on its support package for businesses, the Energy Bill Relief Scheme. All customers are eligible for support except those on a fixed price contract agreed prior to 1st April 2022, as that is when Government determined wholesale prices increased above affordable levels.

We’re waiting on further details from the Government before fully implementing this and communicating when it will be applied to customer bills.

Customers do not need to do anything as the support will be applied automatically to their bills.

Get business debt advice

Charities like Business Debtline give free and independent advice, online and over the phone.

Find out what support is available on our dedicated help page.

Find out more

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