The Truth About Energy Prices

Nobody likes paying high prices for gas and electricity. As winter approaches, many of us wonder how much higher our bills are going to get, and for how long we will be able to afford to keep warm. It was recently reported that energy prices have been rising up to eight times faster than average earnings.

It’s tempting to blame the energy companies and accuse them of greed, but is this fair? The energy companies themselves have costs to meet, which are subject to factors over which they have little or no control. This has been particularly significant in recent years, when diminishing North Sea production has increased British reliance on imported energy.

Global events and their effect on energy prices

Across the world there have been various natural and political events which would have been impossible to predict, but which have made a big impact on the availability, and therefore the price, of energy.

The earthquake, with its associated tsunami, in Japan is one example. The closure of nuclear plants led to Japan importing very high volumes of liquified natural gas, which inevitably impacted on its price elsewhere. Another consequence of the tsunami was the decision made in Germany to reduce the country’s reliance on nuclear energy, which again increased the demand for alternatives.

Political unrest in the Middle East is another factor. Concern about the continuity of oil production following the Arab Spring and its associated uprisings led to an increase in the wholesale price of oil, which in the main has been sustained.

The rapid rate of growth in China, the world’s most populous country, has hugely increased its demand for energy, both to fuel its industrial production and also to meet the demands of its growing number of prosperous consumers.

The energy companies’ response

So, the energy companies can claim with some justification that they are at the mercy of forces beyond their control. But how do they respond to these forces, and do they take advantage of the inflationary climate to boost their profits?

It’s important to understand that some of the British energy firms are not just retailers of gas and electricity, but also producers, and that they all buy energy partly on the wholesale market, but also direct from the producers. They contract for immediate resale, but also months or years in advance, effectively gambling on future changes in the price. So the prices they set to customers can’t be be calculated simply by adding a percentage mark up to the price they pay; the have to take account of current and predicted production costs, of prices they have already paid, and also of the need to meet future demand. Another complication is that the term ‘wholesale energy prices’ is misleading, as energy is traded at many different rates which can change dramatically over the course of a single day. The suppliers therefore are making complex decisions about pricing which are partly based on guesses about the future.

Pricing and profit

The energy companies argue that their profit margin is only about five per cent overall, and that this figure has to cover their investment costs for maintaining future supplies. However, the profits they have made on the production element of their business are generally higher, and in any case, the increase in prices has meant that the same percentage profit now represents much more in cash terms.

Are they all the same?

Nearly all consumers can choose from a range of energy suppliers. They can decide whether they want to find the cheapest possible energy prices, or if they want to take other factors into account, such as the ethical policies of the supplier; whether they use renewable energy sources, or if they are opposed to nuclear power, for example. The way tariffs are constructed, and the size of the standing charge, also vary between supplier. So the energy companies are not all the same, and it can make sense to switch, but also to do a little research first. Whether you are looking for a change in your home energy or if you are a business owner looking for a new commercial energy tariff don’t be afraid to shop around, switching needn’t be a nightmare. Look for providers that focus on customer service and you should be able to switch with relative ease.

Author C McDonald. I am working on behalf of one of the countries leading commercial energy suppliers that Launched in 2006 specifically to serve the electricity needs of small to medium sized business customers. To view their product range please visit www.havenpower.com.