Why our energy bills keep going up: the key questions

Why are energy bills increasing?

Two things are at play here: the workings of the commercial market and government policy.

Energy suppliers have been under fire for years for apparently putting up prices quickly as the wholesale cost of gas rises but not passing on reductions as assiduously. Power companies point out that they buy their supplies of gas up to nine months in advance and so price hikes can kick in which seemingly bear no relation to the current wholesale cost of energy.

Early in November, Ofgem confirmed it is looking into allegations that power companies manipulated prices within the wholesale gas market.

Geopolitical factors can have an effect on the cost of gas, for example the Japanese tsunami or the Arab uprisings, which is why taking energy from less volatile regions can be cheaper. We now import half of our gas and this is set to rise by 2020 to 80 per cent. The price of gas also impacts on the cost of electricity because some electricity is generated by gas-fired power stations.

The policy environment is set by the government, and it has announced that up to £7.6bn can be put on to our bills in order to secure investment in a low-carbon energy infrastructure – a massive increase on the £2.35bn being raised to fund green energy via a levy on our bills this year.

Why are consumers funding the £7.6bn investment in renewables?

The government is committed to renewable energy to, among other reasons, help iron out the price fluctuations in the fossil fuel markets and cut greenhouse gas emissions. The Department for Energy and Climate Change (DECC) has an obligation to generate 15 per cent of energy from renewable sources by 2020. £7.6bn may sound like a huge amount of money, but it is essentially just an incentive which hopes attract firms who will build projects such as wind farms by guaranteeing them a return for their investment. Although energy firms will pay the money initially, these costs will ultimately be passed on to the consumer.

To ensure energy users can derive some benefits to offset the increases in bills, Consumer Focus says the government must introduce more competition into the low-carbon generation market.

Figures provided by the European Commission in 2011 showed that the UK had some of the lowest gas prices for domestic consumers in the EU, with Swedes paying the most.

The other way to stop bills rising as quickly is to use less energy through improved efficiency.

How much money could be saved by better energy efficiency?

DECC says currently only 2 per cent of solid-wall homes are insulated and that a further 7.7m properties are still to be insulated.

It estimates that replacing an old boiler with a condensing model will save the average consumer £100. However, up-front costs mean that it may be some time before that saving makes a difference.

Schemes such as England’s Warm Front help some consumers on low incomes get up to £3,500 of help with insulating their homes.

Home owners and business owners can also get an energy assessment of their properties through the government’s Green Deal scheme which began on 1 October 2012. If the cost of energy efficiency improvements is less than the potential amount of savings on the energy bill, the work can be done with no up-front payment. The cost, which will be added to your bill in installments, should be offset by the reduction in energy usage, meaning that having the work done will not make your bill go up but will make the property more eco-friendly.

However, DECC’s own figures revealed by Channel 4 News in January, suggested that the Green Deal may lead to even fewer people insulating their homes.

In other countries where the weather is colder and energy is more expensive, houses are much more energy efficient already.

Why do we have to invest in renewable energy?

We have committed to generating more of our energy from renewables for several reasons: to reduce the impact of carbon-based energy supplies, to ensure continuity of energy supply and to create job opportunities.

But there is also the important issue of energy security – that is, can continuity of supply be guaranteed? Russia, which supplies 2 per cent of the UK’s gas, and also provides much of our imports of coal and crude oil, is not averse to using its leverage as a major gas exporter to achieve political ends (just ask neighbouring Ukraine). If the sources of energy are domestic, there is less likelihood of supplies being disrupted by civil / political unrest or even natural disasters.

So does the government’s recent plan for fairer tariffs relate to the announcement on renewables?

They are two different things. Bills will definitely go up to fund the renewal of our energy infrastructure but the government says that measures such as insulating our homes and using smart meters will help us become more savvy about how we use gas and electricity, and if we use less we will pay for less, offsetting that rise.

The commercial market for energy supply will remain. The government wants to make energy tariffs easier for consumers to understand so there will be fewer tariffs available but of course energy companies will be able to set them at whichever level they like, and no UK government can dictate the wholesale price in international gas supplies.