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Why do my energy bills keep rising?

Our expert says...

I think most people in the UK would agree with you that energy bills have skyrocketed over the last few years and this has had a huge negative impact on household budgets.

Looking at the price history of British Gas, the UK’s biggest energy provider, shows how sharply bills have risen: in January 2004, an average British Gas bill was £543 and in April 2011 it was £1,286 - a rise of 136% in just over eight years.

Energy profits

But before outlining why energy prices rise, it’s best to clarify something about British Gas’s corporate structure and why media coverage of its profits might not give you a “true” picture.

British Gas is part of Centrica and, although Centrica’s profits were indeed £1.3billion for the first six months of 2011, British Gas’ profits were £270million of that. This does still sound pretty hefty but it was a drop on the £585million from the same period last year - and Centrica’s profits of £1.3billion are also down from £1.6billion for the same period in 2010.

Price rises

British Gas - and the other “big six” energy suppliers - claim that the reason for the price hikes is the rise in the wholesale price of gas, which not only hits the price of gas (as you might expect), but also the price of electricity, because electricity is generated by power stations fuelled by gas.

So when justifying their price hikes, energy companies always trot out the excuse that the wholesale price of gas has risen so therefore domestic bills have to rise. And many enraged customers often look at the wholesale price of gas, see that it hasn’t risen (indeed, it may have fallen) and accuse suppliers of ripping them off. That may appear to be the case, but it’s not quite as simple as that.

The lag between wholesale and domestic gas prices is generally explained by the fact that gas companies buy much of their supply up to nine months in advance. When wholesale gas prices started to rise dramatically in June 2003, domestic prices didn’t start to rise until June 2004 but had doubled by 2006.

In the latter half of 2006, wholesale gas prices started to decline, but because the gas used over the winter of 2006/7 was bought at inflated prices during the summer of 2006, gas bills didn’t start to drop until the spring of 2007.

Dwindling supplies and political turmoil

As supplies of natural gas from the North Sea are dwindling, so the UK is importing more gas than it produces, which affects the price you pay. The European market for gas isn’t fully competitive and when the cold weather bites, European countries horde their gas reserves so the supply falls as demand increases - causing wholesale gas prices to hit the roof.

But even, in October 2006 when gas prices had peaked at record levels, the UK’s energy regulator Ofgem said domestic gas prices in the UK were the lowest in Europe.

In June this year, the European Commission released figures that compared domestic gas prices across the EEC, placing the UK significantly below the EU average.

In the UK, the average cost of burning enough gas to produce a gigajoule of energy (burning one barrel of oil produces six gigajoules) was €11.73 (£9.92 at the time of the survey). This compared to an average €15.88 across the EU's 27 member countries. In Denmark and Sweden, the cost was over €30 a gigajoule.

It’s a similar picture with electricity prices, as the European Commission’s study found the average price of 100 kilowatt hours was €17.08 and that Danish consumers were being charged €27.08. The UK average price was far lower at €14.49.

So, yes, UK energy bills are high, but not as high as the rest of Europe.

Wholesale gas prices are also sensitive to geo-political factors. Unexpectedly harsh winters, unrest in the Middle East, the earthquake and tsunami in Japan and increased demand from China have all helped push up the wholesale price of gas in 2011.

And, due to the UK’s increased reliance on imports, and energy companies compelled by government to spend money to combat climate change and on promoting energy efficiency, it’s more likely than not, that prices will continue to rise.

However, because the UK gas market is competitive, you should be able to reduce your energy bills by switching to a cheaper supplier. Find out more about switching your energy supplier.

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If you have an energy query please email ourexpert@energychoices.co.uk