It’s commonly understood that energy prices continuously rise and fall, but not everyone knows why. There are four main factors that affect energy prices:
- The market:
Energy is a commodity like gold or grain, and therefore is affected by the rise and fall of market prices. Supply and demand often dictate variances in prices; if demand is higher than supply, prices increase. If supply is higher than demand, prices decrease. This is reflected in the costs on your energy bills.
European changes in gas market prices are typically linked to changes in oil prices, which have a knock-on effect on electricity prices.
- Government schemes:
Climate change is a huge issue our planet is facing. That’s why there are government schemes to help tackle climate issues in the UK and worldwide. As companies make the transition towards renewable energy, they must invest in renewable sources to ensure a secure supply of energy when customers need it. Investment and changes in government policy can cause an increase in costs.
- Improvements in technology
As technology advances, developments in areas such as smart metering, energy management and energy delivery networks (the national grid) can both add to, and save money, on energy services.
- Your personal usage
When it’s colder, you’re more likely to put the heating on than you are in the warmer summer months. This means your energy usage increases and therefore so do your bills.
Gas and Electricity prices over the years
Because of all the factors listed above, plus more, energy prices fluctuate hugely.
This line graph shows how gas prices have varied over the last 4 years. As you can see, prices were marginally lower during the summer when demand was lower for heating. The spike in 2018 during February and March was caused by cold weather resulting in high demand. When combined with production shortages and reduced storage capacity, this caused a significant market event. Even during the summer of 2018, gas prices were higher as storage stocks from earlier in the year needed to be replenished. Therefore demand remained high.
Electricity prices have fluctuated hugely over the years and throughout each year. Again, electricity prices are higher during winter months when it’s darker and people use their lights more. The increase in prices in 2016 between September and December were caused by offline nuclear capacity, resulting in a higher proportion of electricity production from wind. The huge fluctuations here are caused by windy and non-windy days. When it was windy there was enough electricity generation to meet demand and prices were lower, when there wasn’t, prices increased as expensive reserve generation was required.
We’ve covered why energy prices rise and fall, but what makes up your energy bill?
The cost on your bill goes towards various aspects of energy. Mainly these are wholesale costs, network costs, operating costs, and environmental/social obligation costs.
Take a look at the pie charts created by Ofgem1 for more detail.
The higher the proportion of contribution to your energy price, the more effect any changes will have on overall cost. Therefore, the biggest influencer to energy pricing is wholesale cost.
Have any questions?
If you have any questions about energy pricing, please don’t hesitate to contact us and we will do our best to help.
1 – Ofgem Wholesale Market Indicators. https://www.ofgem.gov.uk/data-portal/wholesale-market-indicators