What's the real story behind energy price rises?

Up, down, up, down – you’d be forgiven for not knowing what on Earth is going on with energy prices this winter! First, the ‘big six’ energy companies increased prices by an average of 15% last year, and now they’ve announced price cuts of around 5%.

Energy prices are a major issue for all of us – a new study found that 43% of people worry they won’t be able to pay their next energy bill – but with all this chopping and changing, how can we tell what’s really happening? Parts of the media have been grumbling that it’s all the fault of green subsidies – but can this really be true?

Inflation and repairs

Let’s start at the beginning: why did prices rise in the first price? Well, inflation is riding high, which means almost everything is more expensive this year – electricity and gas included.

In the UK, we also have a seriously ageing infrastructure. Much of the power network – all those big pylons and substations – actually dates back to the popularisation of electricity, more than a hundred years ago! So energy companies are spending more and more money on repairs, and they pass those cost on to you.

Wholesale energy price

The above are contributing factors, but the biggie is energy wholesale price. In addition to generating some of their own energy, the ‘big six’ companies also buy a lot of energy on the traded wholesale markets – a bit like the stock exchange for energy. Because fossil fuels are often sourced in volatile parts of the world, like the Middle East, those energy markets can be affected by political events, like the Arab Spring last year.

Anyway, the wholesale price accounts for about half of the energy price that you pay. So when wholesale prices shot up last year, it had a big impact and energy companies put up prices for you and me.

Now that wholesale prices have come back down – they’ve plummeted 32% since September – it stands to reason that we should also be paying less. That explains the recent price cuts.

Money owing?

However, some campaigners argue that the full price drop, as a result of falling wholesale prices, has not been passed on to you and me. Greenpeace says that companies should have passed on average price reductions of 8.4% for gas and 10.7% for electricity.

What do the energy companies have to say about this? Well, their argument is that customers have already been “protected” against some price rises, because when wholesale prices went up last summer, the prices we paid stayed the same for several months afterwards. Now they’re just trying to recoup those losses.

Green policies

Whether energy companies should cut their prices further remains up for debate, but one thing’s for sure: we shouldn’t blame green policies for spiking energy prices.

This popular media claim has been debunked by the Committee on Climate Change (independent advisors to the Government), who have calculated that low-carbon measures were only responsible for only 16% of the £455 increase in domestic energy bills between 2004 and 2010.

What do you think?

How have you been affected by the up-down-up-down trend in energy prices? Do you think it’s worth investing more money in long-term, clean-energy prospects like solar and wind? Or should that wait until the UK’s punters are a little less strapped for cash?