Why are energy prices rising and what does it mean for you?

A word on rising energy prices, the price cap and how it will affect you.

You've probably seen in the news that energy prices are rising. Wholesale energy prices have more than quadrupled since this time last year and 70% of that increase has come since August. There's been a huge surge in demand at a time supply is low, leading to a spike in the price of fossil fuels (especially gas) across the globe.

It's important to note that there is enough supply to go round, so there's no risk of the lights going out or heating grinding to a halt. The problem is that the rise in prices is hitting low-income households and businesses, as well as threatening to leave a dent on the economy.

This can be a worrying time, especially for those with more precarious financial situations, so we want to take a moment to explain what's going on with the energy prices and they might impact you.

Why have global prices increased?

The rising energy market prices are down to a perfect storm of events.

We had a very cold winter in 2020-21, meaning that a lot of us turned the heating up and left gas storage facilities depleted by spring. This was followed by a summer of low energy production, with the weakest winds we've seen in 60 years.

Another factor is that Russia - usually a very big importer to the European market - has exported less gas this year, exacerbating the squeeze. Their exports of natural gas have dropped around one-fifth this year compared to pre-pandemic levels.

This was further compounded by a huge fire in Kent on 15 September which shut down vital power cables linking the UK's energy supply to mainland Europe. Electricity imports via the 2000 megawatt cable have been halted until next March.

And all this is against a backdrop of covid-19. With economies around the world trying to bounce back post-pandemic, there has been a huge jump in demand for gas all at the same time.

How does this impact your energy bill?

The UK imports 35% of its energy, so global events have a high impact on energy prices.

The price you pay for your energy is dependent on several factors. There's the cost of distribution, transmission charges, government tax (VAT), environmental costs and meter provision as well as your energy supplier's costs and profit, though about half your bill is made up from the wholesale cost of gas and electricity.

The rise in wholesale costs has forced energy providers to either increase their prices or shut their doors. Most of the new prices will come into effect on 1 October 2021, though some energy providers have announced that they will be delaying their increase in prices to allow customers to cope with the difficult winter ahead. Make sure you know your supplier's new prices and don't hesitate to get in touch with them if it is unclear to you.

Ofgem, the government regulator for gas and electricity markets, does enforce a price cap that dictates the maximum amount companies can charge on each unit of energy you use. This ensures that customers using either default tariffs or prepayment meters don't pay excessive amounts for their energy. However, due to the rising market costs, the price cap is rising.

How is the price cap changing?

Ofgem sets different price caps for default tariffs and prepayment tariffs.

The default tariff price cap is currently £1,138 and will increase to £1,277 (+£139) from October 1st.

The prepayment tariff price cap is currently £1,156 and will increase to £1,309 (+£153) from October 1st.

This will last until April 2022 when the cap will be reviewed again, though since there is no sign of this easing for winter, experts are expecting to see a similar price cap hike by over 12% in April.

Tariffs going right up to the price cap won't necessarily be the cheapest. If you are either on a default tariff or use a prepayment meter, your bills will almost certainly go up when the new price cap kicks in. Suppliers aren’t obliged to increase the cost of their tariffs along with the price cap, though in general they tend to do so.

Support is available

We know that this is a very difficult time for many households and businesses. Fortunately, there is help out there and we strongly urge you to access it if you are having difficulties with your bills or if you are in debt.

Your supplier will have safety measures to support vulnerable customers so get in touch as soon as possible. There are also government schemes such as the Warm Home Discount, Winter Fuel Payment and Cold Weather Payment, so take advantage of them if you qualify.

Free debt advice

You can free advice on managing debt problems and budgeting through:

We'll be writing more posts in the coming days on the energy crisis so that you avoid losing out financially.

A word on rising energy prices, the price cap and how it will affect you.

You've probably seen in the news that energy prices are rising. Wholesale energy prices have more than quadrupled since this time last year and 70% of that increase has come since August. There's been a huge surge in demand at a time supply is low, leading to a spike in the price of fossil fuels (especially gas) across the globe.

It's important to note that there is enough supply to go round, so there's no risk of the lights going out or heating grinding to a halt. The problem is that the rise in prices is hitting low-income households and businesses, as well as threatening to leave a dent on the economy.

This can be a worrying time, especially for those with more precarious financial situations, so we want to take a moment to explain what's going on with the energy prices and they might impact you.

Why have global prices increased?

The rising energy market prices are down to a perfect storm of events.

We had a very cold winter in 2020-21, meaning that a lot of us turned the heating up and left gas storage facilities depleted by spring. This was followed by a summer of low energy production, with the weakest winds we've seen in 60 years.

Another factor is that Russia - usually a very big importer to the European market - has exported less gas this year, exacerbating the squeeze. Their exports of natural gas have dropped around one-fifth this year compared to pre-pandemic levels.

This was further compounded by a huge fire in Kent on 15 September which shut down vital power cables linking the UK's energy supply to mainland Europe. Electricity imports via the 2000 megawatt cable have been halted until next March.

And all this is against a backdrop of covid-19. With economies around the world trying to bounce back post-pandemic, there has been a huge jump in demand for gas all at the same time.

How does this impact your energy bill?

The UK imports 35% of its energy, so global events have a high impact on energy prices.

The price you pay for your energy is dependent on several factors. There's the cost of distribution, transmission charges, government tax (VAT), environmental costs and meter provision as well as your energy supplier's costs and profit, though about half your bill is made up from the wholesale cost of gas and electricity.

The rise in wholesale costs has forced energy providers to either increase their prices or shut their doors. Most of the new prices will come into effect on 1 October 2021, though some energy providers have announced that they will be delaying their increase in prices to allow customers to cope with the difficult winter ahead. Make sure you know your supplier's new prices and don't hesitate to get in touch with them if it is unclear to you.

Ofgem, the government regulator for gas and electricity markets, does enforce a price cap that dictates the maximum amount companies can charge on each unit of energy you use. This ensures that customers using either default tariffs or prepayment meters don't pay excessive amounts for their energy. However, due to the rising market costs, the price cap is rising.

How is the price cap changing?

Ofgem sets different price caps for default tariffs and prepayment tariffs.

The default tariff price cap is currently £1,138 and will increase to £1,277 (+£139) from October 1st.

The prepayment tariff price cap is currently £1,156 and will increase to £1,309 (+£153) from October 1st.

This will last until April 2022 when the cap will be reviewed again, though since there is no sign of this easing for winter, experts are expecting to see a similar price cap hike by over 12% in April.

Tariffs going right up to the price cap won't necessarily be the cheapest. If you are either on a default tariff or use a prepayment meter, your bills will almost certainly go up when the new price cap kicks in. Suppliers aren’t obliged to increase the cost of their tariffs along with the price cap, though in general they tend to do so.

Support is available

We know that this is a very difficult time for many households and businesses. Fortunately, there is help out there and we strongly urge you to access it if you are having difficulties with your bills or if you are in debt.

Your supplier will have safety measures to support vulnerable customers so get in touch as soon as possible. There are also government schemes such as the Warm Home Discount, Winter Fuel Payment and Cold Weather Payment, so take advantage of them if you qualify.

Free debt advice

You can free advice on managing debt problems and budgeting through:

We'll be writing more posts in the coming days on the energy crisis so that you avoid losing out financially.

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