Why are energy prices so high right now? Should you fix? And what help is available?

The UK energy market has taken a huge turn in recent times. Some are now paying twice as much for their energy compared to a year ago, while the latest Cornwall Insight suggests prices will rise by a massive 65% when the new price cap comes into play from October.

The existing energy price cap, covering April to October, limits the amount providers can charge for a unit of energy. Under the current cap the maximum rate that can be charged is 7.37p per kWh for gas, and 28.34p per kWh for electricity. Importantly, costs can vary between regions.

So while energy prices aren't the same for everyone, the average household can expect to pay the equivalent of £3,244 per year (pro rata) under the current cap. Yet, from October bills will sadly rise again. The question is: by how much?

Should the Cornwall Insight prediction turn out to be accurate, a typical household can expect to be paying £3,244 per year from October—a frightening prospect! Plus, it's been suggested that prices will again rise when the cap is reviewed in January.

So, why are energy prices so high right now? Should you consider fixing? And what support is available out there to help those struggling? Let's take a look.

What is the energy price cap?

Before we dive into the question of why energy prices have risen so much in recent times, let's explore what the energy price cap is, and why it was introduced.

The energy price cap was introduced by the Government in order to address arguments that the state wasn't doing enough to help those paying the highest energy bills.

Up until a few years ago, there were a vast number of energy providers offering competitive tariffs, both variable and fixed. Despite using the same energy supply, it was often the case that a typical energy user could save £100s per year simply by switching provider. As a result, those who pro-actively switched saved the most, while those who didn't switch— either through apathy or unwillingness—typically faced the highest bills. It was often the case that non-switchers were on their supplier's Standard Variable Tariff (SVT), which was often far, far more expensive than other cheaper fixes available.

To address this issue, the energy price cap essentially put a ceiling on the amount that suppliers could charge consumers. This benefited those who typically didn't switch, as the cap meant they'd have some sort of protection from rip-off pricing. That being said, even after the cap was introduced, there were still a number of tariffs that sold energy at a lower cost than the cap. As a result, it still paid to switch supplier.

The price cap has previously come under fire, as there were fears its introduction would make consumers less eager to switch. For example, some believed the cap could give the impression that it was no longer worth shopping around for a better deal. Others, including a few consumer groups, felt that the cap would lead to a reduction in the number of cheap deals, negatively impacting those who switched often. The price cap has also been blamed for the demise of a number of new energy suppliers in recent years.

However, over the past year or so, the price of wholesale energy has soared. Consequently, the purpose of the price cap has essentially been turned on its head. Nowadays, no supplier sells energy at a lower cost than the cap. So, for the majority of UK households, the energy price cap is no longer there to protect those who rarely switch. Instead, the cap is now essentially the one thing that prevents suppliers upping the cost of energy.

The price cap is reviewed by the regulator, Ofgem, every three months (from October). This means that if wholesale energy costs go up, so does the price cap. So unless wholesale energy costs fall in future, higher and higher energy prices every three months could become the norm.

Why are energy prices so high right now?

The soaring cost of energy has been blamed on a number of variables. Perhaps the most obvious is the fact that the cost of fossil fuels plummeted during the early stages of Covid-19 due to lack of demand. Since then, the demand for fossil fuels has soared, as the world economy recovers from a once-in-a-lifetime pandemic. This has had a knock-on impact on wholesale energy costs.

On a similar note, the ongoing war in Ukraine has also had a very big impact on prices. While the UK imports only a small amount of Russian fossil fuels, Russia traditionally supplies the EU with 40% of its natural gas imports. As countries collude to move away from Russian fuels due to its involvement in Ukraine, demand for fossil fuels from other sources has increased. Understandably, this has increased energy costs.

Another reason why energy prices are so high right now is due to the fact that Europe has just experienced a much colder winter than usual. As a result, it's been suggested that levels of stored gas are lower than normal, which again, has helped to increase the cost of energy. The same can be said for the demand for air conditioning in Asia, where higher usage in recent times has led to soaring demand for energy.

Should you fix your energy deal?

It's important to note that, right now, there are no fixed energy tariffs in the UK that sell energy for anything lower than the current price cap. So if you fix your energy deal today, your bill will definitely increase. However, energy costs are now likely to rise higher than expected when the new energy price cap is implemented in October. As a result, fixing your deal now could mean you'll be paying a lower amount than everybody else from October onwards.

There's no direct science to this, as nobody really knows the true cost of the future price cap. However, Money Saving Guru, Martin Lewis, has previously suggested that if you're offered a year's fix at no more than 40% above your current price-capped tariff, you should consider fixing. For more on this, take a look at our exclusive analysis of whether you should switch your energy supplier.

When can we expect energy costs to go down?

Unfortunately, without a crystal ball, it's impossible to say when energy costs will start to go down. However, a peace deal in Ukraine, a mild winter, and an overall reduction in demand could all help to reduce energy prices.

In the longer term, a move towards renewable energy sources will certainly help reduce the volatility of prices, especially as the cost of energy is so closely aligned with the price of fossil fuels right now.

What help is available to help those rising energy bills?

To help those struggling with rising bills, the Government has introduced some support to help. English households in council tax bands A-to D have already received a £150 one-off payment towards energy costs. Meanwhile, in October, the Government is providing households with a £400 reduction in their energy bills as part of a wider £37 billion support package.

The Government has also announced a one-off £650 payment to more than 8 million low-income households on Universal Credit, Tax Credits, Pension Credit and legacy benefits. Pensioner householders will also receive a one-off payment of £300. Meanwhile, those receiving disability benefits will get an additional £150.

More information about this support available can be found on the Gov.UK website.