Energy prices in the UK have soared
thanks to a big rise in the price cap for domestic customers set by regulator
Ofgem. This follows a smaller increase in the price cap in October 2021.
The NGO National Energy Action
estimates that 16% of UK homes were already in fuel poverty, and with the price
cap rise this will jump to a whopping 24% - almost a quarter of all households
unable to adequately heat their homes. That’s 6.5 million households, staggering
for a developed country.
The reason for the rise is quite
simple: gas is almost four times more expensive than this time last year. 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.
What contributes to the cost of
energy?
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.
As you can see in the figure below
from Ofgem, a typical household paying by direct debit will 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.
Networks are the next biggest cost,
making up around £371 of the new cap - an increase of 39%. Part of the increase
in network cost is because 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.
Much has been said on ways to cut the
policy costs, which will be slightly lower under the new price cap. This is not
only limited in impact on bills, since the policy measures make up just 8% of
the price cap, but also shortsighted. These policy measures are to support
energy efficiency measures and renewable energy technologies, exactly the stuff
desperately needed to reduce reliance on gas (although the policy is paid for
from electricity bills). In fact, policy cuts back in 2013 are estimated to now
be costing UK energy bill payers £2.5bn.
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
Professor of Energy,
Newcastle University
This article is republished from The
Conversation under a Creative Commons license
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