Why are gas prices so high?

The rise in energy prices in 2022 put many people under a significant financial strain and forced us all to review how much energy we use.

In this guide, we explore why gas prices have increased and what the future could hold for our energy bills as we look ahead to 2024. But first, let's explore how energy prices are calculated and what affects the price of our gas bills.

How are energy prices calculated?

Energy prices are made up of different charges, including unit rates, standing charges, and taxes, including VAT.

1. Unit rates are the price charged per unit of electricity or gas, measured in kilowatt-hours (kWh).
2. The standing charge is set by your energy provider and is incurred daily. Essentially, it’s what you pay for being connected to the grid. Even if you don't use gas or electricity, you'll still have to pay a standing charge.

What are wholesale energy prices?

Energy suppliers buy gas and electricity from companies on the wholesale market, and these fees make up about a third of your energy bill.

Wholesale energy prices are based on the global gas and electricity market, meaning they can fluctuate very quickly. Demand also plays a significant role in prices, so gas and electricity prices are typically higher in winter.  

What other factors affect gas prices?

As well as the wholesale cost of gas and electricity, your energy provider will charge network costs - these contribute to the upkeep of the gas pipes and infrastructure that carry energy into your home or business.

Network costs vary from year to year; e.g. they may be increased to reflect usage or how funds need to be allocated to different parts of the network. Additionally, network costs cover 'balancing' charges, which help to ensure the constant supply and demand for electricity and gas can be accommodated.

Secondly, large suppliers are required to help pay for Government energy policies. These could cover schemes to support energy efficiency improvements and help vulnerable people.

Other costs that will impact your gas bills include:

• Meter maintenance and installation
• Third-party services, including sales commissions
• Smart metering programme costs
• Administration from data and settlement services

What is the energy price cap?

The energy price cap was introduced by Ofgem in 2019 and is designed to prevent people from being overcharged on their gas and electricity bills.

The price cap limits what you pay for the gas and electricity you use and sets a maximum daily standing charge. Amongst other things, the energy price cap is based on wholesale prices, but it only applies to the rates, so the more you use, the more you pay.

As of April 1st 2024, the current price cap level is £1,690 per year for an average household paying by direct debit.

If you own your own company, you will already know that business energy prices are not capped and although business energy rates are falling, Government support has also been cut.

Why are gas and electricity prices so high?

Despite the energy price cap, prices have fluctuated for several reasons that have all created an array of problems, from Russia invading Ukraine to the energy crisis. These things have all seemingly happened at once, too, and, unfortunately, have impacted our energy bills considerably.

To help you understand why your bills have increased so much, here are the key reasons gas prices are so high.

Long winters

Over the last few years, it has felt like winter started in October and lasted right through until March. These longer cold spells have led us all to rely more on our heating. It's not just affected the UK, but the rest of Europe and parts of Asia.

These chillier temperatures have led to increased demand worldwide for gas, which in turn has reduced supplies more quickly.

The war in Ukraine

In solidarity with Ukrainians following the Russian invasion in February 2022, many European countries decided to cease purchasing oil and gas from Russia. Until then, Russian supplies accounted for approximately 40% of the EU’s oil and gas, meaning countries have been forced to look elsewhere.

This now global supply versus demand deficit has contributed to price increases and caused panic buying, furthering the rate of inflation.

Increased demand in other countries

In recent years, Asian nations like China, Japan and South Korea have all bought large quantities of liquefied natural gas (LNG) to reduce their reliance on coal.

Similarly, South American countries have imported significantly more LNG. This increased demand has meant the UK cannot access the same supplies of LNG as it needs to keep prices down.

This combination of problems has increased the demand for gas worldwide, ramping up the pressures on gas exporters and driving up the cost of gas.

Will energy prices be reduced?

As the demand for gas reduces during the spring and summer months and we rely on our heating less, the energy price cap will most likely fall to reflect the differences in our heating habits. The price cap is also expected to rise during the winter; however, it is expected to be lower than in recent years.

While it is hard to estimate what will precisely happen to UK energy prices, many experts are forecasting that the energy price cap will fall over the next year. Cornwall Insight, for example, has predicted that we could finish 2024 with an energy price cap of £1,521.02, a reduction of over £400 compared to the start of the year.

So, after the financial pressures of the last few years, we may have some good news to look forward to when future energy price cap levels are announced in the coming months.

How can you keep your energy bills low?

The first thing you can do is look at how much energy you're currently using and identify improvement areas. This could include spending less time in the shower or boiling the kettle with less water. These changes may seem small, but over a year, they will positively impact your bills.

Additionally, to help you save money on your energy bills, you can:

• Turn your thermostat down by one degree.
• Use a smart meter to track usage and habits.
• Invest in thermostatic radiator valves.
• Ensure your boiler and heating system is suitable for your home.
• Switch to alternative energy sources, e.g. by having solar panels installed.

Read our guide for ten more ways to save money on your energy bills.

Another way you could reduce your gas bills is by investing in a new boiler. With higher gas prices, switching to a more energy-efficient appliance could help you save. So, if your boiler's on the blink, use our find a boiler tool, and we could install your new appliance as early as tomorrow.