Why are energy prices so high in the UK?

For several years leading up to 2021, energy prices in the UK were steady and relatively affordable. Unfortunately, electricity and gas prices skyrocketed post-2021, largely due to the Russia-Ukraine war and partly due to several other factors, such as low gas reserves, demand spikes, and lower-than-expected renewable energy generation.

High energy prices have affected consumers directly through hefty utility bills, increased fuel poverty, and indirectly through inflation. And although these prices have fallen since their recent peak in 2023, they’re still considerably higher than the pre-2021 period and a source of concern for most households in the UK.

In this article, we’ll examine the causes of these high energy prices and the “energy price cap” along with its effects. We’ll also take a closer look at different charges on consumer utility bills, and the potential indirect effects of energy prices on credit scores.

What costs are included in my energy bill?

Before we take a look at the factors affecting energy prices, it’s important to understand the costs included in your gas and electricity bills. They are:

• Standing charges. Set by your gas and electricity suppliers, these charges cover the costs of maintaining the energy supply network, taking meter readings, and supporting the UK government’s social and environmental schemes. Standing charges apply every day, regardless of whether you use energy or not, and the amount you pay depends on where you live. Not all suppliers include a standing charge in their tariffs. Instead, some offer a tariff that works similarly, but consumers pay more for the first 1-2 units of energy they use.

• Unit price rate. Also known as a unit rate, this is how much you’ll be charged per unit—or kilowatt hour (kWh)—of electricity or gas you consume.

• Taxes, such as VAT.

The charges included in your energy bill are influenced by multiple other costs, including those of the network (for maintaining, running, and upgrading energy networks), social and environmental costs (to help pay for government energy policies), direct costs such as meter installations, and supplier operating margins. 

You might have heard of the “energy price cap,” which limits how much energy suppliers can charge consumers. The cap doesn’t restrict the unit rate or standing charges individually, but it limits the overall amount suppliers can charge you. 

One of the biggest costs influencing your energy bills, though, is wholesale energy costs, which make up around a third of them. Wholesale prices are the amount you’re charged for the energy purchased to supply your home or business, and they’re affected by various factors, such as demand and global markets. 

Here’s more on how these prices are being influenced in the UK…

4 Factors affecting wholesale energy prices in the UK 

1. Russia-Ukraine war

February 2022 marked a significant escalation in the Russia-Ukraine war following Russia’s full-scale invasion of Ukraine. Consequently, western countries and many allies imposed sanctions on Russia, and it responded by restricting fossil fuel supplies to Europe. 

However, relative to many European countries, the UK’s reliance on Russian fossil fuels was low even before 2022. In 2021, imports from Russia made up just 4% of gas, 9% of oil, and 27% of the coal used in the UK. 

So why has the UK been heavily affected—and why have energy prices in the UK increased more than in other European countries like France or Germany? 

One reason is that various factors have contributed to the rising prices, but in the context of the Russia-Ukraine war, it’s because of the impact on global markets. Avoiding Russian gas means that there’s more competition for these resources from other suppliers since global demand remains high. Consequently, fossil fuel prices have risen in the global market. 

2. Lower renewable energy generationf

In an effort to reach net zero emissions, the UK has been investing in renewable energy sources (namely solar and wind) to reduce its energy dependency on fossil fuels. And we’ve certainly made strides in the right direction—in 2023, 41.1% of the UK energy mix was from renewables, with wind power in the lead, contributing to 29.4% of the UK’s total electricity generation.

However, despite renewable energy's success, consumers haven’t benefited from lower energy bills. On the contrary, Bloomberg’s research suggests that overestimations of power production by energy companies have added millions of pounds annually to consumer electricity bills. According to their findings:

• Extra costs are linked to issues with Britain’s electricity network. On days with particularly strong winds, there’s a risk that wind power may overload the electricity system. To prevent this overload, grid operators pay firms not to generate on these days, which costs consumers hundreds of millions of pounds annually.

• Inaccurate production estimates further increase costs. Bloomberg’s research and a report by the Times suggest that some wind farm operators may have exaggerated their energy production goals. If an operator overestimates their production capacity, they’ll receive more compensation when they’re asked to turn generation off by the grid. In other words, according to these findings, the grid has compensated some wind farms for halting the production of power that the operators might have been unable to generate. 

Other factors have also slowed the success of Britain’s wind power plants, such as a delay in shipments preventing the completion of the UK’s biggest offshore wind farm. Additionally, environmental factors mean that wind farms produce less energy in the summer, which is another constraint for the industry.

Unfortunately, these challenges mean that, for now, wind power isn’t contributing to lower consumer energy bills. However, the UK remains a leading wind power producer globally, and the government has plans to significantly increase wind power through offshore wind farms. So this outlook may change in the future. 

3. Low gas reserves

European countries’ gas storage levels have recently recovered from their record low in 2021 which affected gas prices. However, according to experts, the UK remains particularly vulnerable to unpredictable changes in gas prices.

Although the UK was significantly less reliant on Russian gas pre-2022 than many other European countries, relatively higher gas consumption and comparatively smaller gas storage capacity are to blame for this price vulnerability. Other European countries can stock up on gas when demand—and prices by extension—is low, whereas the UK’s smaller capacity makes this option impractical. Consequently, the UK is also more reliant on Liquified Natural Gas (LNG), which is significantly more expensive than pipeline natural gas.

4. Many energy companies went bust

Up until the drastic increase in energy prices in 2021, many smaller energy suppliers offered consumers competitive plans for electricity and gas. However, these companies operated differently from major energy suppliers; the smaller retailers didn’t really produce their own energy, but bought electricity and gas from the wholesale market and sold it to consumers.

So when energy prices rose, wholesale costs exceeded the amount that these suppliers could legally charge as per Ofgem’s energy price gap (which we explain in the next section). These UK retailers could no longer operate profitably, and dozens of them were forced to close down. Consequently, consumers now have fewer competitive options and choices for energy suppliers overall.

What does the energy price cap mean for prices?

Ofgem introduced the energy price cap in 2019 to make sure consumers are charged fair prices on their standard variable tariff (default tariff) by limiting how much they pay for each unit of consumed gas and electricity. It also sets a maximum daily standing charge, i.e., how much a supplier can charge you at most if you don’t use any energy on that day. 

The cap is based on typical household energy consumption and is designed to reflect the cost of energy. Various costs are included in the price cap, so any changes to these costs impact the cap when it’s reviewed every three months. 

For the third quarter of 2024 (July-September), the energy price cap stands at £1,568. This is the amount a household will pay in a year if it uses the average amount of gas and electricity and makes the payment via direct debit. 

You’re covered by the energy price cap if you pay your electricity or gas bills by any of the following methods:

• Direct debit

• Prepayment or Economy 7 (E7) meter

• Standard credit (the payment is made when you receive your electricity or gas bill)

The price cap applies to standard and default tariffs, which the majority of households are on.  However, keep in mind that the price cap limits energy rates, so your energy bill is still relative to how much energy you use.

While the price cap’s intended purpose was to make sure consumers are charged fairly for energy, some research suggests it may also have negative effects. The cap has been criticised for contributing to a “wholesale market price” for energy, limiting consumer options and potentially costing them more in the long run.

KMPG UK’s research revealed that 48% of the surveyed bill payers agree that the cap reduced their available options to get a better energy deal. Additionally, over 40% said they’d like to switch to a fixed deal but have limited available options, and agreed that the price cap has reduced competition in the energy market. 

Bill Bullen, CEO of Utilita Energy, said the energy cap will cost consumers more in the long run. A report last year from the Centre for Policy Studies argues that the cap is “preventing customers from accessing lower energy tariffs, contributing to inflation, and should be abolished.”

While the price cap’s effectiveness is currently under debate, it’s still in place at the time of writing this article in 2024.

Do energy prices affect credit scores?

Energy prices don’t directly affect credit scores, but payments to your energy supplier(s) can under some circumstances. Your utility payments may or may not appear on your credit report, because utility accounts (gas, electricity, water) are only sometimes reported to the credit reference agencies (CRAs). 

It’s worth finding out if your energy supplier(s) shares information with any of the three main UK CRAs (Experian, Equifax, and TransUnion), because your credit report will reflect this information if they do. 

If your utility providers do report to the CRAs, making your monthly payments to them on time can increase your credit report’s positive payment history, contributing to a good credit score. On the other hand, missing payments or paying bills past their due date can have negative consequences because it may lead to:

• The missed or late payments being reported. Late or missed payments appear as negative markers on your credit report and lower your credit score. Account information is reported for 6 years and therefore, can have a long term impact.

• Your account being “defaulted”. An account can be defaulted due to missed payments as this is a breach of the credit agreement. A default is a severe negative marker on your credit report and will lower your credit score.

• Legal action. If you owe a utility provider money and don’t pay it back, they might take legal action. This can result in a County Court Judgment (CCJ), which is a severe negative marker on a credit report that will lower your score. CCJs will show on your credit report even if your utility providers don’t share account information with the CRAs, because this information is collected from public records. 

Although rising wholesale energy prices don’t directly influence the factors above, they affect the cost of gas and electricity bills and contribute to inflation. Consequently, more UK consumers are struggling to pay their bills (including for energy) and credit repayments. So high energy prices can indirectly affect some consumers’ credit scores by contributing to a higher likelihood of late or missed payments. 

What can I do if I’m struggling to stay on top of my energy payments?

If you’re struggling to keep up with energy payments, there are two organisations you can reach out to for help.

Citizens Advice and StepChange Debt Charity can both connect you with a professional advisor, and they have helpful guides for people who are behind on their energy bills. Citizens Advice’s guide offers advice on negotiating payment plans with your supplier, what to do if you can’t afford the plan, and alternative methods and schemes for paying off your debt. StepChange’s guide also offers general advice and shares specific schemes and funds to help you out.

As of the time of writing this article, many UK citizens are struggling to keep up with their bills, even though energy prices have fallen from their peak and inflation has slowed. So if energy bills are weighing you down, don’t beat yourself up over it—many factors outside of our control are making it difficult to pay them. 

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