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January 2022 update

This paper was first published in October 2021. This updated versions includes the latest data on prices but does not update any of the earlier analysis.

The price of energy has dramatically increased in recent months; both in the UK and globally. Gas has led the price rise, but electricity prices have followed as gas is one of the fuels used to generate electricity. The prices are causing widespread concern and knock-on impacts for both domestic and commercial energy consumers.

Wholesale gas prices increased steadily from spring, rapidly from late summer

Gas has led the price rise, but electricity prices have followed as gas is one of the fuels used to generate electricity. The prices are causing widespread concern and knock-on impacts for both domestic and commercial energy consumers. The UK is vulnerable to global price volatility as it is a net importer of natural gas (meaning it imports more than it exports).

The price rise has several causes. An important factor is the return of global gas demand as economies restart after pandemic-related restrictions. Demand has been particularly high in some areas due to cold weather. Supply has not been able to keep up with demand. Regional factors in Europe may have worsened the situation. Parts of Europe receive gas through pipelines from Russia. There is debate about whether the Russian supplier Gazprom could do more to increase supply.

There are some additional factors within the UK that have contributed to the high price. Low levels of wind, outages at nuclear plants, and a fire that has shut down a key electricity interconnector have all contributed to a need for greater use of gas power stations.

Most heating in the UK is supplied by gas. As a result of the reliance on gas, domestic energy bills will go up. The energy regulator Ofgem enforces a price cap on some domestic tariffs. The cap is reviewed twice a year; the price rose by £139 at the previous review in August 2021 (which came into effect in October), and it has been reported it could rise substantially when the next cap is introduced in April 2022.

Estimates in this paper suggest that higher wholesale prices to late November and paying for the costs of energy supply firms that have gone out of business could increase the price cap by between £450 and £600. If wholesale prices increase further and/or other costs increase, the price cap could be even higher.

The high gas price rise has forced several energy suppliers out of the market.

In the short term, there are calls from most sectors for the Government to step in with emergency funding. Longer term, the crunch has led to calls for changes to energy policy.


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