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6 October 2021

Will record-high gas prices push up household energy bills?

Wholesale prices rose precipitously this morning. When will household bills follow?

By Emma Haslett

The wholesale price of UK natural gas rose sharply today (6 October), with contracts for delivery in November rising almost 40 per cent to peak at a record high this morning.

The rise pushed prices beyond the previous record, which occurred during the “Beast from the East” storm in 2018. For households that are already struggling with rising energy prices, this could have serious implications.

Why are gas prices rising?

The price of energy has soared in recent months as countries ended their lockdowns and demand, particularly from countries in Asia, began to increase. In the UK and across Europe, that factor is exacerbated by lower-than-average supplies of gas in storage after a cold winter last year and falling domestic production. 

The UK has been particularly badly hit because it is one of Europe’s biggest users of natural gas – according to the 2019-20 English Housing Survey, 86 per cent of dwellings in the UK have gas central heating. 

Will rising gas prices hit my energy bill?

Not immediately. If you’re on a standard variable tariff (SVT), you are protected by Ofgem’s price cap, which limits how much energy providers can charge their customers to £1,277 per year for a typical household. Usually, an SVT would be more expensive than the fixed-price deals offered by energy providers, but yesterday the Financial Times reported that suppliers were offering fixed-price deals that were hundreds of pounds higher than the price cap.

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Even if you are on an SVT, expect bills to rise in the longer term: Ofgem is due to review the price cap in April 2022. Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, believes households may be in for a shock.

“By my calculations, electricity and natural gas futures prices now point to around a 33 per cent increase in Ofgem’s default tariff price cap in April,” he tweeted yesterday. “That’s a lot of pain for low-income households coming down the tracks.” 

It’s also worth emphasising that energy suppliers aren’t protected by the price cap – so expect more insolvencies as April approaches. 

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Why have some energy suppliers gone bust and others haven’t?

Most of the larger energy suppliers are well-hedged – they have agreed a price for their energy in advance. This is a gamble, because energy prices can fall as well as rise, so some may find themselves paying more than they need to if they’ve agreed a price in advance and prices suddenly drop. For the larger energy companies, however, it’s an insurance policy worth buying.  

But many suppliers operate with very tight margins, and smaller companies have opted not to hedge – meaning that when prices began to rise, they faced an immediate rise in costs.

What happens if my energy company goes bust?

Customers of suppliers that go out of business are automatically transferred to another supplier chosen by Ofgem. 

It’s good news because your supply won’t be interrupted – but you may be transferred to a “deemed” contract that is higher than your previous contract (because the supplier has to buy additional wholesale energy at the last minute when it takes on new customers) or an SVT, which may be higher if you were on a fixed-rate tariff with your previous supplier, and may rise in April when Ofgem reviews its prices.

Which energy suppliers have gone out of business so far, and which companies were they switched to?

So far this year, 12 suppliers have ceased trading, according to Ofgem:

  • Enstroga (29 September): 6,000 customers switched to E.On
  • Igloo Energy (29 September): 179,000 customers switched to E.On
  • Symbio Energy (29 September): 48,000 customers switched to E.On
  • Avro Energy (22 September): 580,000 customers switched to Octopus
  • Green Energy (22 September): 255,000 customers switched to Shell Energy
  • People’s Energy (14 September): 350,000 domestic and 1,000 non-domestic customers switched to British Gas
  • Utility Point (14 September): 220,000 customers switched to EDF
  • PFP Energy (7 September): 82,000 domestic and 5,600 non-domestic customers switched to British Gas
  • MoneyPlus Energy (7 September): 9,000 customers switched to British Gas
  • Hub Energy (9 August): 6,000 domestic and 9,000 non-domestic customers switched to E.On
  • Green Energy Network (27 January): 360,000 customers switched to EDF
  • Simplicity Energy (27 January): 50,000 customers switched to British Gas Evolve.

[See also: “It is truly bonkers”: Greg Jackson, Octopus CEO, on the UK’s broken energy system]