Why are gas prices so high and what is happening to fuel bills?

Image source, Getty Images

Householders in the UK will find out in the next few weeks how much their gas bills are likely to increase in the coming year.

The energy regulator is due to announce the new energy price cap - the maximum amount that suppliers can charge in Great Britain.

It's expected to rise steeply, because global wholesale prices have gone up so much.

What's going to happen?

Every six months, Ofgem, the energy regulator, reviews the maximum price that suppliers in England, Wales and Scotland can charge domestic customers on a standard - or default - tariff.

This is called the energy price cap.

About 15 million households saw their energy bills increase by 12% when it was last updated in October.

The next review is due at the beginning of February, and the new cap will come into effect in April. Industry predictions suggest gas prices could go up by as much as 50%.

There is a separate energy market in Northern Ireland, with two gas suppliers, and prices have risen sharply for consumers there too.

Why have prices been rising?

There's been a worldwide squeeze on gas and energy supplies over the past year.

As a result, wholesale gas prices have risen to unprecedented levels. At the end of December, they hit a new record of 450p per therm, which experts think could take average annual gas bills to about £2,000 next year.

Reasons for the increase include:

  • a cold winter in Europe in 2020/21, which put pressure on supplies and, as a result, meant stored gas supplies dropped
  • a relatively windless summer meant it was difficult to replenish those supplies
  • increased demand from Asia - especially China - for liquefied natural gas

There are a number of technical and geopolitical issues at play as well, which mean many countries across Europe are grappling with the same problems.

However, the UK is hit relatively hard-hit because it is one of Europe's biggest users of natural gas. Around 85% of homes have gas central heating, and it also generates a third of the country's electricity.

Storage capacity in the UK is also lower than in some other European countries.

Image source, AFP

What effect has this had in the UK so far?

Since wholesale gas prices started to spike, more than 20 retail energy suppliers have collapsed in the UK.

This is largely because the energy price cap prevented retailers from passing on higher wholesale prices to their customers.

Several smaller companies, with fewer reserves, could not weather this.

Failed firms include Bulb Energy, with 1.7 million customers. Because of its size, it was put into "special administration", and is now run by the government, through Ofgem.

Nearly four million customers have been affected. Many households saw their energy prices rise when their supplier went bust, and they were switched over to a more expensive deal with another supplier.

Can the government intervene to keep prices lower?

The government faces calls from energy companies, the opposition, and even some of its own MPs, to do more to prevent prices from rising too much.

Suggestions include:

How can I protect myself from rising prices?

In the past, consumers have been encouraged to shop around when energy bills rise.

But at the moment better offers - including fixed deals - are simply not available.

People already on fixed deals are advised to stay put.

Instead of searching for a cheaper deal, householders are being encouraged to improve the energy efficiency of their homes.

The Energy Saving Trust says that simple changes to our homes and habits could offset the current price rises.

How are rising energy prices affecting business?

Many companies face a considerable rise in their bills. That could mean they have to:

  • reduce or pause production - or even cease trading - which could cause job losses
  • pass their increased costs on to customers through higher prices

Energy-intensive industries are particularly exposed, but the problem affects every company that has to pay energy bills - even if it is just to heat an office or shop.