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Energy bills: why yours is now so expensive, and where all the money goes

The rise in energy bills has families checking their budgets. But what’s behind it? Newcastle University’s Professor Sara Walker explains.

Energy bills in the UK soared in April thanks to a big rise in the price cap for domestic customers set by regulator Ofgem. Another steep hike is expected in October when the cap goes up again. 

Household energy bills are expected to rise above £3,600 this winter, according to research from Consultancy Cornwall Insight. It’s hundreds of pounds more than previous predictions. 

The NGO National Energy Action estimated that four million households were already in fuel poverty in October 2021. As of the start of April 2022, 6.5 million households were believed to be in fuel poverty – an increase of 50 per cent. 

The NEA estimates 8.2 million households will be in fuel poverty after October. That’s almost one in three households.

The reason for the rise is quite simple: gas prices have soared. The UK is a net importer, and delivery from suppliers such as Norway, Qatar and Russia is significantly more expensive due to a global demand increase over the past year. 

The gas market is further impacted by European efforts to move away from Russian supplies following the invasion of Ukraine. These issues affect the price of natural gas used for both heating and electricity, since natural gas is also used to generate about a third of Britain’s electricity.

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Why are energy bills so expensive?

The price of energy is made up of several different things. The biggest chunk is the wholesale cost of electricity and gas which your supplier will buy through markets from the companies who own the power plants, or from gas importers. Then there are the costs to run the national and local electricity and gas networks, VAT, the cost of technologies such as smart meters, policy costs for things like energy efficiency schemes, and the profits made by energy companies.

In April, Ofgem predicated that a typical household paying by direct debit would see a bill increase from £1,277 to £1,971. Most of that increase is down to the price of gas, which has doubled the wholesale price of energy in the bill, from around £500-worth of the previous bill, to more than £1,000.

Chart with breakdown of energy costs
Breakdown of costs in the energy price cap: (based on dual fuel customer paying by direct debit, typical energy use) Ofgem

Ofgem is predicting that prices will rise much further later this year. Jonathan Brearley said in late May that a typical household would pay £800 a year more from October. Giving evidence to MPs in July, he said it was “clear” that figure was too low.

Cornwall Insight said the typical gas and electricity bill in England, Wales and Scotland could be more than £3,600 in the new year. It’s hundreds of pounds more than previous predictions.

Many smaller energy suppliers have gone bust recently, and when a supplier goes bust, other companies are asked to take on their customers. The suppliers who do this are known as the “supplier of last resort”. Because they may have costs which can’t be recovered when they take on new customers, the cost is spread over everyone’s bills.

Operating costs cover the general costs of customer services and billing, as well as a profit margin. Big profits being reported by the likes of Shell and BP are primarily because of the sales of oil and gas they are making in the wholesale market, so this is different to the profits of your energy supplier.

BP has reported huge profits of £6.9billion between April and June as families are left facing sky-high bills during a cost of living crisis. This is the second highest in the company’s history and triple the figure made in the same three months last year.

So what can we do?

One argument is that the UK should produce more gas within its own borders. But this won’t solve the problem, since gas is a global commodity and prices in the UK are determined based on global trades, regardless of where the gas is extracted. UK-produced gas exports to mainland Europe in October 2021 were more than four times that of the previous October simply because it was more profitable.

Clearly, to reduce its exposure to gas prices the UK needs to use less gas, either by using a different fuel for heating, lighting and cooking, or by simply using less energy in the first place.

To use less, the country needs a programme of energy efficiency measures and it needs it urgently. This programme needs to tackle those households most in need first – colleagues and I have shown that energy efficiency improvements enable home owners to afford to heat their homes for longer periods of the day – and we need to work out a fair way to pay for these improvements. Using less energy is a win-win, since it reduces reliance on natural gas, supports the transition to net zero, and reduces energy bills.

Though the government has announced some measures to plaster over the problem, none clearly target those most in need. The divide between rich and poor in the UK is expanding. The price of energy and its associated impact on cost of living is a ticking time bomb which we must tackle, to reduce inequality and raise living standards for all.

Sara Walker, is professor of energy at Newcastle University

This article is republished from The Conversation under a Creative Commons license. Read the original article.It will be updated with the latest facts and figures about your energy bills.

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