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Why Are Energy Prices Rising?

Rising energy prices in the UK are inescapable. They’ve soared to unprecedentedly high levels this year (2022). Thankfully, the introduction of the government’s Energy Bill Relief Scheme at the start of October has provided some respite for many UK businesses, find out more with Business Energy Comparison.

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Why Are Energy Prices Rising So Much in the UK?

Prior to the introduction of the support, Make UK, the manufacturer’s organisation, conducted a survey on the impact of energy bill rises on manufacturers. It found that 42% of the manufacturers it surveyed had seen electricity bills increase by more than 100% in the last 12 months. It also found that 32% of respondents had seen more than 100% price increases on gas.

But what’s behind these rising energy prices? What’s causing business energy prices to be so steep in the UK?

Why Energy Prices Are Rising in Europe

Wholesale energy prices have risen globally, so it’s certainly not a problem that’s exclusive to mainland Europe or the UK. The rates first began to increase steeply last December (2021), and the trend of volatility hasn’t really let up since.

For Europe, the soaring prices of both gas and electricity we’re currently seeing have been caused by several factors, the origins of which can be traced back to 2020.


Harsh Winter of 2020/2021

Europe endured a particularly harsh winter, bringing Arctic weather conditions to countries across northern and central Europe. Naturally, this meant that more gas was consumed to provide heat during those prolonged spells of cold weather.

However, this resulted in natural gas storage facilities being depleted to below-normal levels for countries across the continent.


Rise in Liquified Natural Gas (LNG) Demand from Asia

With the higher LNG demand from Asia, there’s been less being shipped to Europe, which has caused greater competition and price rises.


End of COVID-19 Lockdown Restrictions

This resulted in an increase in demand worldwide as the world began to return to normality – with manufacturing, retail, and entertainment and leisure businesses amongst the many finally able to resume activity.


Russian Invasion of Ukraine

In late February of this year, Russia invaded Ukraine. This resulted in Germany halting the then-recently completed Nord Stream 2 Baltic Sea pipeline project.

Nord Stream 2 is a pipeline from Russia to Germany designed to provide double the annual capacity of the existing Nord Stream 1 pipeline, from 55 billion cubic metres (BCM) to 110 BCM.

Additionally, Russia also reduced the Nord Stream 1 pipeline’s capacity to 20%, before closing it completely. To put this into context, Russia supplies around 40% of Europe’s natural gas.


Resulting Wholesale Marketplace Volatility

All of these factors have contributed to the perfect storm – with less natural gas but continued high levels of demand as winter approaches in Europe. Low supplies and high demand is driving wholesale market rates to levels not seen – certainly not in recent times.

This is illustrated by Ofgem’s Wholesale Forward Delivery Contracts Price Trends (for both gas and electricity wholesale prices):

Ofgem line graph illustrating how wholesale gas prices per megawatt-hour have sharply increased from February 2021 to August 2022

By Monday 22 August 2022, the cost per megawatt-hour (MWh) of gas at wholesale had reached £592.56 compared to £48.29 on Monday 1 February 2022.

Ofgem line graph illustrating how wholesale electricity prices per megawatt-hour have sharply increased from February 2021 to August 2022

By Monday 22 August 2022, the cost per megawatt-hour (MWh) of electricity at wholesale had reached £511.20 compared to £53.08 on Monday 1 February 2021.

Source: Ofgem, Wholesale Forward Delivery Contract Price Trends, October 2022

However, here, in the UK, we also have our own set of additional challenges:

Reliance on Gas to Generate Electricity

We currently generate around half of our electricity from gas-powered stations.

There are a couple of reasons for this, including:

– low winds, which have resulted in wind farms generating less power
– unplanned maintenance at several of the country’s nuclear power stations

Both of these factors have put greater pressure on gas supply solely for the purpose of electricity generation.

Lack of Gas Reserves

The UK doesn’t have the gas stockpiling facilities many other European nations have.

Rough, just off the east coast of England, and the largest gas storage facility in the UK was closed by British Gas owner, Centrica back in 2017 due to safety issues. Though Rough reopened in October 2022, it currently only offers around 20% of its previous full storage capacity.

This means the country relies on real-time supplies – i.e., gas gets used as it gets delivered. The capacity we do have is just 2% of the total annual demand – amongst some of Europe’s lowest gas reserves.

In contrast, Germany hit its target to get reserves to 95% capacity in October – or enough to last the country two cold months.

Will Energy Prices Go Down in 2023?

We saw wholesale energy prices fluctuate during October, falling for the first time in a while.

However, wholesale energy prices are expected to remain high through 2023 and potentially into 2024 – according to the latest market insights.

But with forecasts changing regularly as prices at wholesale continue to fluctuate, it’s difficult to estimate how much they’ll rise.

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Average Business Energy Consumption By Sector

We’ve compiled a rough overview of average business energy consumption within a variety of sectors – to give you a better idea of how much you might pay:

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Is There Any Help With Business Energy Bills?

Yes, there is. The Energy Bill Relief Scheme (EBRS) has been introduced to help business energy customers across England, Scotland and Wales manage during this period of uncertainty (for Northern Ireland, the scheme works slightly differently – you can read more about the Northern Ireland EBRS scheme here).

If you have a non-domestic energy contract, you’ll be eligible if you’re…

– a business
– a voluntary sector organisation (i.e., a charity)
– a public sector organisation (i.e., a school or hospital)

And you’re…

– on an existing fixed price contract that was agreed on or prior to 1 December 2021
– about to sign a new fixed-price contract
– on a deemed / out-of-contract or variable tariff
– on a flexible purchase contract or a similar contract

Businesses using their gas or electricity supply to generate power to sell back to the grid aren’t eligible to benefit under the scheme.

The Energy Bill Relief Scheme (EBRS) is essentially a support package that will provide a discount on gas and electricity prices for businesses. Prices have been limited at:

– £211 per MWh for electricity
– £75 per MWh for gas

Demonstrating the level of support being provided, government forecasts have shown wholesale energy costs are expected to be much higher than the government-supported rate:

– £600 per MWh for electricity
– £180 per MWh for gas


How Will the Energy Bill Relief Scheme Work?

Any discount will automatically be applied to any eligible business customer’s bill. The government will then provide the supplier with the difference between the EBRS rate and the rate at wholesale.

If you’re on a fixed contract your discount will reflect any difference between the EBRS price and the relevant wholesale price charged by your supplier on the day your fixed-term contract was agreed.

If you’re on a variable, deemed or another contract type , your discount will reflect the difference between EBRS price and the relevant wholesale price charged by your supplier. However, it’ll be subject to a maximum discount of:

– £354 per MWh for electricity
– £91 per MWh for gas


How Long Will the Energy Bill Relief Scheme Last?

The scheme is currently due to last the whole winter period, running from 1 October 2022 until 31 March 2023.

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What Can I Do To Avoid the Current Business Energy Price Rises?

With the current wholesale market volatility expected to continue into 2023, it might be worth switching to a fixed-rate energy deal – if you’re on a variable contract.

If you’re already on a fixed-rate contract that’s due to expire, comapre business gas and electricity prices to find the best deal. This will help to provide your business with some certainty, as well as protection if wholesale prices continue to rise as they have done.

And switching has never been easier than with Business Energy Comparison!

If you’re approaching your switching window and are near the end of your contract – we can help you find that better deal and potentially help you save thousands of pounds in the process!

Start your business electricity comparison journey today by getting your free business energy quote. Complete the form at the top of the page – we’ll help you find the right energy deal for you organisation faster than you can pop the kettle on!

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