Why our energy bills are still going up even when wholesale prices are going down
The cost of energy on the market has been falling for months - but many customers are yet to benefit
Many households will have received a letter informing them their gas and electric bills are going up in April. But why are energy bills still going up at a time when wholesale prices have gone down?
In fact, both wholesale gas and electricity prices have fallen steadily since December 2022, but that drop has seemingly not been carried over into energy bills. The price cap set by regulator Ofgem, which sets energy bills for more than 80% of UK homes, is £3,280 a year as of April 1.
Like many, I received a letter this month from my supplier, E.ON, telling me that my bill is increasing from April. My electric has gone from 33.966p per unit to 33.282p so it's actually gone down. But my standing charge has jumped from 49.168p to 53.826p.
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My gas has stayed the same but my standing charge has increased from 28.484p to 29.112p. It seems that energy companies are quick to pass on rising gas prices to the customer but less keen to reduce bills when wholesale costs come down. The last time wholesale energy prices were as low as now was September 2021, when the price cap was £1,277 a year - a whopping £2,000 less than it is in April this year.
I asked E.ON why my bills have barely reduced for each unit of energy and how the company can justify whacking up the standing charges. Their response was quite vague and pointed out that "throughout the energy crisis which has been caused by rising global energy prices, Ofgem has very much taken the lead in terms of setting the cap on energy prices on standard tariffs across the board".
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The E.ON spokesperson added: “We are all acutely aware of the crisis in global energy markets and the ongoing impact on customers’ bills. Following Ofgem’s price cap review, the Government announced that the Energy Price Guarantee would remain at £2,500 until the end of June to help ease the cost of living. We know these are incredibly difficult times and we urge any customer who is struggling to get in touch as there are ways we can help.”
It doesn't quite explain why things are still going up. Here is how the wholesale price of energy affects the bills consumers pay - and everything else you need to know about how these costs are worked out:
What are wholesale gas and electricity prices?
Energy firms buy the power they sell consumers from the companies that generate it. The cost they buy it at is known as the gas and electricity wholesale price. Wholesale UK gas prices are now around 137p per therm - a unit of heat - down from highs of around 590p a therm in August 2022. Meanwhile, wholesale electricity prices have dropped from 511p per megawatt hour in August 2022 to just 145p today.
Why do wholesale energy prices rise and fall?
Supply and demand affects the price of wholesale energy, as does where the power has come from. For example, the UK gets around 40-50% of its gas from the North Sea and needs to import the rest, leaving us open to big fluctuations in European gas prices. Other factors include how much gas the UK has in storage, weather conditions and the strength of the pound.
If wholesale energy falls in price, will my bill go down?
While energy bills are based on wholesale prices, they're not in real time. That is because wholesale energy costs fluctuate a lot. To get around this, energy firms 'hedge' by buying gas and electricity well ahead of when it is needed. They can do this months - and even years - ahead of when they actually need it.
It means that our current monthly bills do not reflect today's prices, but rather the wholesale cost from when the supplier first paid for the energy. So it can take a while before low wholesale prices bring down energy bills. There are several different ways of tracking wholesale costs, including the current price and the season ahead, and these all need to drop to impact energy bills.
Ofgem chief executive Jonathan Brearley said the lowering of the Ofgem price cap from April "reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won't make an immediate difference to consumers, it's a sign that some of the immense pressure we've seen in the energy markets over the last 18 months may be starting to ease".
He added: 'However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of Government support that is currently in place, this is a very tough time for many households across Britain."
Other factors that affect energy bills
For millions of customers on variable rate tariffs the daily charge for electricity and gas, applied whether you use any power or not, will leap, with some set to pay 80% more when they take effect in spring. Customers - like me - understand that the price of energy changes. But the system of delivery remains the same so it's difficult to understand how companies can justify increasing standing charges. On social media customers from a wide range of suppliers have posted reported rises of about 20p a day, or £73 a year.
Standing charges are a daily fee for gas and electricity customers and are added to your bill regardless of how much energy you use. Ofgem does not set a limit on this part of your bill – it is down to suppliers how they break down unit and standing charge prices below its overall cap.
However, it does make assumptions about how this will be done and, confusingly, publishes average standing charges on its website. These suggest that, from April 1, direct debit customers will typically pay 45p a day to their electricity provider – up from 25p a day now – and 27p a day for gas – up from 26p now. Those increases add £76.65 a year to an average bill. Ofgem also suggests the highest standing charges are paid by those who have a prepayment meter or who settle their bills by cash and cheque.
A study by National Energy Action (NEA) has revealed that for the typical customer, standing charges have increased by two thirds since the introduction of the 2019 Ofgem price cap. Adam Scorer, chief executive of the fuel poverty charity NEA, said the standing charge has been growing "for years". He added: "Despite the UK Government’s recent commitment to freeze the level of the Energy Price Guarantee (EPG) from 1 April, standing charges will reach record levels. The regulator controls how costs are passed through to consumers. We know that low-income households lose out the most from its default approach to standing charges. It is high time for change."
Finally, there are one-off factors contributing to why bills might be higher. Although the UK government confirmed it would keep the guarantee at £2,500 for another three months, customers will lose the government's £400 discount off bills, which runs out at the end of March having given households money off their bill since October.
MoneySavingExpert Martin Lewis explained in March how this would impact bills, saying: "So in practice you will pay more, just not as much more as you were paying. And especially for those with lower usage where that £66 was a disproportionate boost. Because if you're a lower user it had a bigger effect. This is going to feel a big loss when it comes to April."