Energy Guides

What will happen to energy prices in 2012?

Updated: 30 January, 2012

By Martin Fagan

What’s in store for gas and electricity prices this year? And how can you ensure your energy bills are as cheap as possible?

The last 12 months has seen a rollercoaster of energy prices that has gone up and up, only to dip slightly when consumers least expect it.

At the end of 2010, and over the summer of 2011, energy prices rose by an average of 21%. According to uSwitch.com, the two rounds of price rises since the end of 2010 added a total of £2.24billion onto the UK’s collective energy bills.

Then, over a hectic week in mid-January this year, all of the “big six” energy suppliers - British Gas, EDF Energy, E.ON, Npower, Scottish Power and SSE - reduced either their gas or electricity prices by an average of 5%.

The single-digit price reductions for a single fuel type (depending which type your supplier reduced) does little to offset the previous double digit rises - this year’s price cuts will trim £340million off the previous £2.24billion, says uSwitch.com. On average, the reductions are the equivalent of deducting 15% from last year’s price hikes.

But could this be the first wave in a tide of price cutting by the big energy companies? Or is this just a periodic lull before prices shoot up again? What factors determine energy prices and how do we interpret them in order to predict which direction energy prices will go next?

Effect of wholesale prices on the consumer

A major factor in whether or not your energy bills will rise or fall is the cost of energy on the wholesale markets. Companies selling electricity or gas to households normally don’t produce all of this energy themselves.

Instead, they buy an increasing amount of the energy they sell to you on the wholesale energy markets, on which the price of energy (predominantly gas, but also electricity) fluctuates not only day by day, but minute by minute.

Energy prices reflect a lot of factors, all of which are in constant flux. These can include anything from infrastructure problems (leaking pipes, faulty nuclear reactors) to oil embargoes, natural disasters (such as last year’s Japanese earthquake and tsunami which knocked out a crucial nuclear power station) to economic turmoil and political unrest, upheavals and even war.

Also, because Britain is so heavily reliant on imported fuel sources, anything that happens to the global energy market will have a dramatic impact on our country’s energy supply and household energy bills.

But if consumers’ bills reflected these fluctuations there would be uproar, because the size of the bills would be utterly unpredictable making budgeting impossible. So to smooth the prices consumers pay for energy, the big suppliers pre-order energy in advance at a pre-determined price for delivery at a future date. This is called the “forward energy market” for obvious reasons.

In theory, this is why increases and reductions in wholesale energy prices take a while to be reflected in consumers’ bills. I say “in theory” because energy regulator Ofgem recently reprimanded the “big six” for being swift to increase consumers’ bills when wholesale prices rose, but less than swift to reduce household bills when wholesale prices fell.

So what are wholesale prices doing at the moment?

The wholesale energy price for both gas and electricity peaked in June 2008. The big energy suppliers reacted quickly and hiked our prices. But the wholesale price spike lasted only a month and prices fell away rapidly returning to pre-spike levels by the end of 2008. However, household bills didn’t reflect the fall in wholesale prices, as the big energy companies maintained the increases and didn’t pass on the price drop.

According to the watchdog Consumer Focus, the wholesale price of energy is currently falling and has been doing do since the summer of 2011, when the “big six” hiked their prices for a second time in nine months. In its forward predictions for the first half of 2012, UK energy regulator Ofgem sees wholesale energy prices flat-lining. However, during the same period, the Bank of England is factoring a 10% price increase in wholesale gas prices into its predictions for the next six months.

‘Green’ measures will also push up prices

Government policies to make Britain greener will also see our bills increase. The current government is on a mission to reduce energy consumption, by making homes more energy efficient, and is also seeking ways to address climate change. But also by putting energy prices up in order to discourage usage.

Part of this includes environmental legislation which suppliers must meet to reduce CO2 emissions. However, the costs to comply with these changes are likely to be passed on to the consumer, making our bills go up.

In the first annual energy statement, delivered to climate change minister Chris Huhne announced plans to cut UK carbon emissions by 34% by 2020, and at least 80% by 2050. Huhne said that the impact of these climate change and energy policies could see consumer energy prices rise by 18% for gas and 33% for electricity.

As a result, and depending on whose forecasts you believe, consumers could have to pay an extra £277 to £373 a year on their annual household fuel bills to cover these costs.

Avoid getting hit by unexpected price hikes

Although this current round of price movement has been downwards, history shows us that energy prices rise far more often that they fall. For example, in January 2006 the average household energy bill was £660 a year. Once the all price cuts come into effect, the average household energy bill will be £1,259 - an increase of 91% in seven years, says uSwitch.com.

To avoid getting stung too badly by any potential increase in energy prices it’s important that you compare gas and electricity prices regularly to make sure you’re still on the best deal for you.

Also consider getting an online tariff, which in most cases work out a lot cheaper than suppliers’ standard energy plans, and start paying via monthly direct debit.

Another good way of cutting down on your bills is to assess the energy efficiency of you home - read our energy efficiency guide for useful money saving tips and advice.