The cost of household gas and electricity is rarely out of the news – a hot topic among both the public and parliament, recent energy price rises have hit consumers twice as hard as cost increases have coincided with wage stagnation in the UK, meaning many are struggling to pay their bills.
In an ideal world, energy price forecasts would accurately predict trends, changes and movements in the global energy market to give consumers and providers at least some indication of what to prepare for.
On the one hand, energy price forecasts should be a relatively simple science – assume they’re on the rise and you won’t be too far off the mark – but, in reality, the range of factors affecting energy make accurate short-term predictions all but impossible.
Energy price forecasts still need to be made though, and to even begin to predict where the market is headed, we first need to have an idea of what’s affecting prices.
There are a range of factors affect the price of gas and electricity, such as supply and demand, availability, wholesale costs, transport costs, and infrastructure maintenance.
Even things like wars and natural disasters in a country that produces gas or oil can affect the price we pay to boil a kettle, or fire up the central heating here in the UK.
This is because the instability brought about by wars and natural disasters usually leads to a reduction in production and accessibility – the 2011 conflict in Libya, for instance, caused oil prices to jump to a two-and-a-half-year high.
The demand for energy not only drives the whole energy system, but is arguably one of the largest factors affecting its price. Energy demand is about more than just domestic consumers, and comes from across all industries in all sectors, from fuel and transportation, to manufacturing, computers and telecommunication to construction.
The wholesale price of the raw resources, such as coal and gas, plays a big part in the price that consumers pay for their energy. These prices vary frequently on a global and European scale as countries bid to meet demand. As and when prices in the ‘wholesale’ market change, these can very quickly impact smaller supplier prices and equally those from the “Big Six” resulting in changes to the amount we pay for our home energy.
The growing adoption of sustainable energy sources is slowly beginning to erode our reliance on traditional fossil fuels, and the use of more diverse energy resources means there is less demand on any single resource, which will hopefully lead to price drops in the future.
Wholesale energy costs make up roughly 46.6% of your overall energy bill, while energy delivery accounts for 24.3%. Other factors which affect the price of your energy bills include government policies (10.2%), taxes (5.9%), suppliers’ operating costs (9%), and of course, the supplier’s profit (4%).
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The growth of sustainable energy sources has the potential to slow, and even eventually reverse the rise in gas prices, but it looks like nothing can stop a rise in electricity prices.
This is partly due to the fact that many of the UK’s electricity generation plants have closed down due to the EU’s Large Combustion Plant Directive, a ruling that has since been superseded by the Industrial Emissions Directive (as of January 1, 2016). Coal fire power stations are being targeted to help reduce emissions in energy generation.
But the increasing popularity and availability of sustainable energy - wind and solar power are gradually becoming more mainstream ways of generating energy - could eventually lead to lower electricity prices.
Energy prices have been high since a 35% spike in 2008, and price rises have barely slowed down since. So it looks as though we’re set for steady increases in the cost of energy for the foreseeable future, with increases in demand, transportation costs, wholesale prices, and government legislation all set to keep costs high.
Although the Committee on Climate Change (CCC) has confirmed that EU energy efficiency rules have been forcing down energy bills and emissions since 2008, it’s also warned that the UK needs to implement new policies to stop a complete reversal of these results over the next few years.
It warns that unless the UK moves more quickly towards electric cars and strategies to insulate millions of homes and create new forms of heating that don't foul the air or crank up climate change, then both emissions and bills will increase.
The cost of transporting gas and electricity is predicted to rise by around 5-6% and 8-15% respectively in the next few years. And consumers will undoubtedly bear the brunt of these increases as energy suppliers will compensate for any additional outgoings by raising their own prices.
An energy demand forecast can also give us an indication of cost, as prices tend to rise with demand, and it’s been predicted there will be a 35% increase in energy requirement by 2041 – although this seems a long way off, it highlights how energy prices will steadily increase.
Energy companies announced a wave of price hikes during 2017 that pushed up prices right across the board – if you’re currently with one of the ‘Big Six’, here’s how their price increases could affect you.
And if you’re on one of the many fixed-rate deals due to end this year, then you could soon see a sharp increase in your energy bills, unless you make the switch to a better deal.
If you’ve never run a comparison for your home energy bills, then there’s a good chance you’ll be paying too much. By comparing suppliers, you could find a much better deal on your home energy.
And if you’re looking for a little more stability with your energy bill prices, and want to protect yourself from potential future price hikes, you should consider signing up for a fixed rate tariff.
With energy prices climbing and showing no sign of slowing down, the best way to save money reduce your bills is to improve your energy efficiency. Making simple changes to improve your efficiency can save you money, plus it’s good for the planet, too.