Why Are UK Energy Prices So High?

by | Sep 13, 2018

Why are UK energy prices so high?  Here’s some insight from Tim Sealy-Fisher, Head of Key Accounts at Smarter Business.

As one of the UK’s leading energy brokers, we have our finger on the current when it comes to the UK’s energy price fluctuations. What we have found recently is that suppliers across the board are increasing their energy tariffs, many for reasons out of their direct control. Energy prices are on the rise, and they’re unlikely to come down anytime soon.

This article explains why UK energy prices are so high, and what your business can do about it.

82% increase in wholesale energy prices in the UK.

I recently compared the daily power reports from 26/01/2016 and 21/08/2018. Early 2016 saw the industry’s lowest wholesale electricity prices in many years. Since then, there has been an 82% increase in wholesale electricity costs (from a flat average price of 3.3p/kWh to 6.06p/kWh). Although this is a rudimentary example (the calculations behind it are complex), the trend is clear – the cost of wholesale energy is increasing steadily in the UK.

However, electricity prices are just one item on your energy bill, making up about 40-50% of your total invoice. Along with increased wholesale energy prices, we have also seen substantial increases in non-electricity costs – for example, the government continues to invest in renewable generation to meet carbon reduction targets; these are ultimately paid for by the customer.

Why are UK energy prices so high?

The key factors for increases in wholesale energy prices UK are:

Gas prices
Gas prices are indexed to Brent Crude oil prices. In January 2016, the cost of oil was $30 bbl; it is now trading at just under $73 bbl. Moreover, the cost of gas feeds directly into the cost of electricity for gas-fired generation plants (which generate 35%-45% of the UK’s electricity).

Gas Storage
The closure of the UK’s main gas storage facility mid-2017 has left the UK more reliant on gas imports from liquefied natural gas (LNG) ships and imports from Europe. Previously, the UK used to inject gas into the (now closed) storage facility in summer for us to withdraw in winter, thus reducing our exposure to international demand.

With the pound comparatively weak against the Euro, there is a greater incentive for Europe to import energy from the UK, putting pressure on the supply/demand curve and increasing UK prices. Naturally, the cost for us to import energy from the continent has also increased as a result of the currency’s tightening.

Recent weather
The ‘Beast from the East’ sent shockwaves throughout UK energy markets as the UK faced gas shortages and price spikes in the first week of March this year. Later in the year, the UK and Europe were hit by a heatwave. This meant that gas which would usually be injected into European storage for winter has been burnt for electricity generation during summer to manage temperature load (air conditioning), reducing storage for winter months and increasing prices as a result.

EU Emissions Trading Scheme
The European Union Emissions Trading Scheme is a key pillar of European climate policy.  Electricity generators purchase permits (credits) for the amount of carbon they produce, having a significant impact on fossil fuel generators and driving up their cost to serve. The carbon price has increased from just under €6/tonne a year ago to a  market high of €21.8/tonne on the 27th of August. Ultimately, this is all priced into the wholesale cost of electricity.

The time is now to switch and save

More than ever, energy consumers are motivated to find the cheapest energy deals to mitigate the effects of increasing energy tariffs. Smarter Business can compare the energy prices from over 20 suppliers to find a contract that best suits your business’ needs and budget. Do get in touch with one of our energy experts for a no-obligation quote: https://smarterbusiness.co.uk/

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