Energy Bills Likely to Remain High in the UK for the Next Few Years
The UK has been grappling with soaring energy bills over the last 18 months, which has led to record double-digit inflation and a cost-of-living crisis. These challenges have been caused by the surge in power prices due to the cut in natural gas supplies from Russia to Europe and the full-scale invasion of Ukraine. These prices have now fallen, and consumers may feel some relief in July when lower energy prices translate into utility bills. However, experts warn that high energy prices are likely to persist.
What Has Happened So Far?
Wholesale gas prices in the UK were stable and cheap for years, fluctuating at about 50 pence per therm between 2010 and 2021. However, this changed in the summer of 2021. As economies reopened after the coronavirus pandemic eased, and Russia began cutting supplies, prices started to fluctuate.
Gas prices jumped when Russian troops poured over the border into Ukraine, reaching 640 pence per therm in August 2022. Ofgem’s price cap, which governs how much a typical household pays and is reset every three months to reflect changes in wholesale costs, had reached £4,279 a year by January 2023. This is almost four times higher than in 2021. The government stepped in with a subsidy, known as the Energy Price Guarantee, which capped the typical annual bill at £2,500, costing taxpayers an estimated £29.4bn.
What Does This Mean for Bills?
Wholesale prices have fallen, but they are still well above the pre-war average. Ofgem lowered its highest price to £2,074 since July, and analysts expect it could dip below £1,900 in October. However, it’s still more than £750 above early 2021 levels.
Energy suppliers buy gas months and years in advance, and future gas prices are projected to remain above 110 pence per therm for the next three winters. They are expected to fall back to 92 pence in 2026, according to commodity analysts firm ICIS. The electric grid will also require significant investment in the coming years to connect wind farms under construction and handle the expected increase in demand as households switch to electric cars and heat pumps.
Could Competition Between Suppliers Help?
Shopping for a cheaper deal below the price cap-governed default rates, known as “change,” has been popular for years. This trend was encouraged by Ofgem’s efforts to increase competition among energy suppliers. Dozens of suppliers have entered the market, offering discounted rates. However, the energy crisis triggered a market rout, and more than 30 suppliers collapsed under the weight of rising wholesale costs.
Analysts do not expect a return to cheap deals after Ofgem takes steps to ensure a more stable market. Suppliers remain wary of further wholesale price hikes or higher costs due to policy changes. Fixed-price offers may return, but the shift is expected to be driven by customer service and innovative products.
What Are the Prospects for the Second Half of the Decade?
Electricity demand will increase as the electrification of the economy accelerates. Recent modeling expects electricity prices to remain above £100 per megawatt-hour through 2030 and beyond. One driver will be increased domestic demand, while another will be increased electricity exports to France as generation from the country’s fleet of aging nuclear power plants declines.
There is uncertainty about the future shape of the retail and wholesale markets, with the government exploring a range of reforms. These reforms include different prices for consumers depending on their proximity to the generating capacity and special rates for less affluent households. One of the key questions is how to fund a future social rate.
Engaging Piece: How Energy Companies Can Cope with High Prices
The soaring energy prices in the UK have created a challenging landscape for both consumers and energy suppliers. Companies are under pressure to find ways to reduce costs while consumers continue to struggle with ever-rising energy bills. Here are some strategies energy companies can adopt to cope with high prices:
1. Invest in Renewable Energy Sources
Renewable energy sources like wind and solar power have a low marginal cost, which makes them attractive. By investing in renewable energy sources, energy companies can reduce their reliance on fossil fuels, which tend to be more expensive. This shift will also help reduce the carbon footprint of energy companies.
2. Increase Energy Efficiency
Increasing energy efficiency is one of the most effective ways to reduce energy consumption and lower bills. Energy companies can help their consumers achieve this by providing energy audits, promoting smart meters, and offering energy-saving tips and advice.
3. Diversify Energy Sources
Energy companies can reduce their exposure to price fluctuations by diversifying their energy sources. This move will help companies mitigate risk and provide them with more flexibility to navigate an ever-changing market.
4. Leverage Data Analytics
Data analytics can help energy companies identify areas where they can optimize their operations, reduce costs, and enhance the customer experience. By analyzing customer data, energy companies can identify which customers are most likely to switch to a competitor and take proactive measures to retain them.
Conclusion
The current energy crisis in the UK is a challenge for both consumers and energy suppliers. However, there are strategies that energy companies can adopt to cope with high prices. They can invest in renewable energy sources, increase energy efficiency, diversify energy sources, and leverage data analytics. These strategies will not only help energy companies reduce costs but also provide value to customers. With careful planning and execution, energy companies can cope with high prices and thrive in an ever-changing market.
Summary:
Soaring energy bills over the past 18 months have hit UK households hard, fueling a cost-of-living crisis. The prices have surged after Russia cut natural gas supplies to Europe in the run-up to its full-scale invasion of Ukraine. While late last month, Jonathan Brearley, head of Ofgem, warned households not to expect utility bills to return to pre-crisis levels until at least the middle of the decade. Wholesale gas prices in Great Britain were cheap and stable for years, fluctuating at about 50 pence per therm between 2010 and 2021, effecting an increase in the summer of 2021, which intensified after Russian troops poured over the border into Ukraine. Wholesale price easing has meant Ofgem lowered its highest price to £2,074 since July, and Investec analysts expect it could dip below £1,900 in October, but are still more than £750 above early 2021 levels. Shopping for a cheaper deal below the price cap-governed default rates, known as “change,” has been popular for years. However, the energy crisis triggered a market rout, and more than 30 suppliers collapsed under the weight of rising wholesale costs. Energy companies can mitigate the effects by investing in renewable energy, increasing energy efficiency, diversifying sources, or leveraging data analytics.
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Soaring energy bills over the past 18 months have hit UK household budgets hard, fueling record double-digit inflation and a cost-of-living crisis.
The surge power prices, after Russia cut natural gas supplies to Europe in the run-up to its full-scale invasion of Ukraine, have now fallen and consumers will start to feel some relief in July, when that translates into utility bills lower energy.
Yet late last month, Jonathan Brearley, head of Ofgem, warned households do not expect utility bills to return to pre-crisis levels until at least the middle of the decade, with analysts warning that high prices are likely to persist further.
The Financial Times explores the reasons behind the regulator’s warning and what is likely to happen to energy bills in the long run.
What has happened so far?
For years, wholesale gas prices in Great Britain they were stable and cheap, fluctuating at about 50 pence per therm between 2010 and 2021.
This changed in the summer of that year, with economies reopening as the coronavirus pandemic eased and Russia began cutting supplies. Prices then jumped after Russian troops poured over the border into Ukraine, rising up to 11-fold to 640 pence per therm in August 2022.
As of January 2023, Ofgem’s price cap, which usually governs how much a typical household pays and is reset every three months to reflect changes in wholesale costs, had reached £4,279 a year, almost four times higher than in 2021.
By then the government had stepped in with a subsidy, known as the Energy Price Guarantee, which capped the typical annual bill at £2,500, costing taxpayers an estimated £29.4bn. But when the limit falls below that level, most family support will end.
After a relatively mild winter and efforts across Europe to reduce demand, wholesale prices have fallen but are still well above the pre-war average.
What does this mean for bills?
Wholesale price easing has meant Ofgem lowered its highest price to £2,074 since July and Investec analysts expect it could dip below £1,900 in October, but it’s still more than £750 above early 2021 levels .
Energy suppliers buy gas months and years in advance and future gas prices remain above 110 pence per therm for the next three winters, before falling back to 92 pence in 2026, according to commodity analysts firm ICIS .
These levels reflect continued supply and demand uncertainty in Europe and tight gas margins globally. In turn, gas prices largely dictate the cost of electricity due to the critical role of gas-fired power stations in Britain.
Wholesale costs are the largest component of energy bills, accounting for about 50% of the July price cap. The remainder of the bill breaks down into items such as operating costs and supplier profit margins, subsidies for renewable generation and vulnerable households, and the cost of operating gas and electricity networks.
The latter, the so-called network costs, which account for almost 20% of the July cap, have increased by more than half since 2018. While inflation has played a role, a contributing factor has been higher costs to balance the electricity supply and demand, which has become more complicated due to the growing share of intermittent renewable energy in the UK’s energy mix.
The electric grid will also require significant investment in the coming years to connect the growing number of wind farms under construction and handle the expected increase in demand as households switch to electric cars and heat pumps, often referred to as the “electrification” of l ‘economy.
Could competition between suppliers help?
Shopping for a cheaper deal well below price cap-governed default rates—”change” in industry parlance—was all the rage less than three years ago.
Spurred by Ofgem’s efforts to increase competition, dozens of suppliers have entered the market offering discounted rates. But the energy crisis triggered a market rout with more than 30 suppliers collapsing under the weight of rising wholesale costs, which put an end to discounted flat rates.
Analysts do not expect a return to cheap deals after Ofgem takes steps to ensure a more stable market and suppliers remain wary of further wholesale price hikes or higher costs due to policy changes.
“Fixed-price offers may return, most likely from the third quarter, but we don’t expect a deluge of cut-price offers,” said Martin Young, an analyst at Investec. “We see the shift being driven by customer service and innovative products.”
What are the prospects for the second half of the decade?
It is difficult to predict wholesale energy prices for more than four years. But analysts agree that electricity demand will increase as the electrification of the economy accelerates.
Recent modeling from consultancy Cornwall Insight expects electricity prices to remain above £100 per megawatt hour ‘through 2030 and probably beyond’ – double the historical norms.
While one driver will be increased domestic demand, another will be increased electricity exports to France as generation from the country’s fleet of aging nuclear power plants declines, according to the analysis.
This would represent a reshaping of energy flows: Britain has historically been a net importer of electricity from France, apart from last winter, when several French nuclear power stations were shut down for maintenance.
“We believe that [French nuclear reactor closures] it’s going to start happening in the late 2020s,” said Thomas Edwards, senior modeler at Cornwall Insight. “At the same time, we need to include hydrogen, electric vehicles, heat pumps – all of which will increase electricity demand.”
But there is uncertainty about the future shape of the retail and wholesale markets with the government exploring a range of reforms. These range from consumers who pay different prices depending on their proximity to generating capacity to special rates for less affluent households.
But “the devil is in the details,” said Simon Virley, head of energy at KPMG. One of the big questions is how to fund a future social rate. “Does the money come from taxpayers or other energy bill payers?”
https://www.ft.com/content/72d22af6-abf9-4c44-8a86-83b47b4edb1f
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