Why Are Energy Prices Rising? What Can I Do?

Energy prices have skyrocketed over the past few months and they show no signs of stopping any time soon. But why exactly are energy prices rising and what could be the best thing for you to do?

Rhiannon Philps Last updated on 04 February 2022.
Why Are Energy Prices Rising? What Can I Do?

Everything seems to be getting more expensive recently – food, fuel, and, of course, our energy bills.

Energy prices have risen astronomically over the past year, and this trend is set to continue into 2022 with the energy price cap rising 54% (from the previous price cap) in April 2022..

This is devastating news for many, and the charity National Energy Action reports that six million households could end up in fuel poverty from 1 April, an increase of two million from the start of October 2021.

Although increases in our energy bills are unavoidable, here we explain why prices are going up and what you can do to try to minimise their impact.

Why are wholesale energy prices rising?

Our energy bills are going up because wholesale gas prices – the amount energy suppliers pay for gas – have rocketed. Ofgem says wholesale gas prices have quadrupled over the course of 2021, which has caused many problems for energy suppliers.

After the coronavirus lockdowns in 2020, there was an increase in demand for gas across the whole world, which put a strain on supplies. This demand rose even further during the cold European winter in 2020/21, which depleted a lot of our stored gas reserves.

Demand for liquefied natural gas has also been high in Asia, and especially in China, which has affected supply in Europe and increased prices.

Other geopolitical factors and infrastructural issues have further contributed to the rising energy costs.

Great Britain is particularly affected as it is heavily reliant on gas for central heating and for generating electricity. According to the Energy Saving Trust, around 85% of British homes use gas central heating, which means the country is particularly vulnerable to any changes in wholesale gas prices.

Exacerbating the issue is the fact that the UK hasn’t been able to generate as much renewable energy as usual, which has further increased our reliance on gas.

All of these factors combined have effectively caused a UK and global energy crisis.

Because of this major financial pressure, many energy suppliers have gone bust, affecting millions of customers.

What has this meant for the UK?

Because wholesale gas prices soared over the course of 2021, suppliers had to pay more for energy.

Suppliers pass on these higher costs to households by increasing their energy bills. However, there is a limit to how much they can charge customers because of the Ofgem energy price cap.

What is the energy price cap?

The energy price cap is the maximum that suppliers can charge households per unit of gas and electricity. It only applies to variable and prepayment tariffs, not fixed-rate tariffs.

The cap is set by Ofgem, the government regulator for the energy market in Britain, and aims to make sure that customers are charged a fair price for their energy. It is reviewed every six months and any changes come into force in October and April.

This cap only applies to England, Wales and Scotland. In Northern Ireland, the energy market works differently and there is no equivalent price cap.

To reflect the rising cost of wholesale gas, in April 2022 the energy price cap for default tariffs will increase by £693 to £1,971. For prepayment tariff customers, the price cap will increase by £708 to £2,017. These figures are calculated based on the energy usage of a ‘typical’ customer; if you use more energy, you will pay more.

» MORE: What is the energy price cap?

When are energy prices going up?

On 3 February 2022, Ofgem announced that the energy price cap would rise by 54%. This increase will come into force from 1 April 2022.

As a result, any household on a variable or prepayment tariff is likely to see their bills rise dramatically from April.

As if this wasn’t worrying enough, it also seems likely that the price cap will rise again in October 2022 after it is reviewed again in August.

Even though the price cap only applies to variable and prepayment tariffs, the cost of signing up for a new fixed-rate tariff will also be affected by the rising energy prices.

What can I do about it?

Unfortunately, you can’t avoid the fact that your energy prices will increase.

In normal circumstances, switching to a fixed-rate tariff would nearly always be the best option. However, in this kind of energy crisis, a lot of the old advice is thrown out the window, which can make it confusing to know what to do next.

Below is some general guidance on what you can do, but bear in mind that every situation is different so make sure you do your own research before taking any action.

If you’re on a prepayment tariff

The price cap for prepayment tariffs is higher than if you pay by direct debit. So, if you’re on a prepayment meter, switching to a standard credit meter and paying by direct debit could help you to save some money on your energy.

Some households won’t be eligible to move off a prepayment meter – if they owe more than £500 to their energy supplier, for example.

If you’re on a fixed-rate tariff

If you’re on a fixed-rate tariff that you took out before the cost of energy skyrocketed, consider yourself to be very lucky.

You are almost certainly paying considerably less for your energy than the current price cap and any fixed-rate deals on the market, so it’s a good idea to stay on your fixed-rate tariff until it finishes.

Once your current deal ends, you will automatically be switched to your supplier’s variable tariff. Usually, it would be better to switch to a new fixed-rate deal but, in this situation, sticking on the variable tariff may currently be the best option. You’ll be ‘protected’ by the energy price cap to a certain extent, and a new fixed-rate deal may well be higher than the cap.

If you’re on a variable tariff

In the past, variable-rate tariffs were more expensive than fixed-rate tariffs, so you may have looked into locking in a fixed deal.

However, in the current energy climate, sticking with a variable-rate tariff is likely to be the best option for many. This is because the energy price cap limits how much suppliers can charge customers on variable tariffs, but the cap doesn’t limit how much suppliers can charge for fixed tariffs.

As a result, most, if not all, fixed-rate tariffs are currently more expensive than the price cap and any variable tariffs.

If you’re on a variable tariff, you do need to bear in mind that your energy bills will rise when the new price cap comes into action from 1 April 2022.

This means that, as we get closer to this date, sticking on a variable-rate tariff may not necessarily be the most cost-effective option. It is worth comparing different fixed-rate tariffs regularly, both from your existing supplier and other suppliers, to see if any good-value deals become available.

» MORE: Different types of energy tariffs explained

Should I switch to a fixed-rate tariff?

There isn’t a definitive answer to this question as everyone’s situation is different and we don’t know what energy prices will be like in the future.

Whatever tariff you’re on, you will end up paying more for your energy than you do currently, so whether you should fix or stay on a variable tariff depends on your circumstances and your own preferences.

If you choose a fixed tariff:

  • You are likely to pay more for your energy than if you stayed on a variable tariff, at least in the short term.
  • You get price certainty for the length of your deal, protecting you from any further price rises within that time frame.
  • If energy prices stabilise or fall, you may end up paying more than if you had stayed on a variable tariff. However, you could pay an early repayment fee to leave your deal early and move to a new, cheaper tariff.

If you choose a variable tariff:

  • You are likely to pay less than if you took out a fixed deal now, at least in the short term.
  • If energy prices fall, you won’t be tied into an expensive fixed-rate deal so you can switch to a cheaper tariff elsewhere.
  • Your energy bills will increase when the price cap rises.
  • If energy prices continue to rise, fixed-rate tariffs could become even more expensive than they are now so you would have missed your chance to fix at a lower price.
  • You have no price certainty, so if energy prices increase further there is a risk that you could end up spending more in the long term than if you had fixed earlier.

As you can see, it’s a difficult decision to make.

At the time of writing, staying on a variable tariff is likely to be the cheapest option for now. However, this situation can quickly change, so make sure you research what fixed-rate tariffs are available on a regular basis to see if there are any that offer a good deal.

What if I can’t afford my energy bills?

As our energy bills increase, more and more households will struggle to afford basic essentials. With National Insurance increasing in April and the overall cost of living on the rise, the finances of many families are being stretched to their limits.

While cutting down on your energy use could help you to save some money on your bills, it is likely to be a small drop in the ocean compared to the amount that energy prices are rising.

As a result, Chancellor Rishi Sunak announced some new support measures to help families with their energy bills.

Households in England in council tax bands A-D will receive £150 from their local authority, which won’t need to be repaid. Scotland, Wales and Northern Ireland customers will receive similar funding.

Domestic electricity customers will also receive a £200 discount on their bills from October 2022. However, this will need to be repaid in £40 instalments over the course of five years, starting from 2023.

If you’re finding it difficult to pay your energy bills, and are having to decide between food and heating for example, then you should ask for help as soon as possible.

You can contact your energy supplier to say you are struggling to afford your bills, and you may be able to arrange a new payment plan. If you can’t come to an agreement and you pay for your energy by direct debit, your supplier may want to switch you to a prepayment tariff.

Some energy suppliers offer grants and hardship funds, so it’s worth seeing if you are eligible for any support from your provider.

Also, make sure you check if you are eligible for any of the following government schemes:

  • Warm Home Discount
  • Winter Fuel Payment
  • Cold Weather Payment

There may be some local grants available too, so check with your local council to see if they can offer any support.

» MORE: Help if you can’t afford your energy bills

If you are struggling with your finances and debts, you can also contact charities for help and advice, such as:

» MORE: How debt charities can help

Image source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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