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Edinburgh Live
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Katie Williams

Why energy bills are so high as price cap expected to hit £4,200 by January

Energy bills are forecasted to his £4,200 by January according to the latest data.

Energy industry analysts Cornwall Insight predict energy prices are going to soar even higher following the price cap increase we saw in April earlier this year. The price cap is expected to rise by 81 per cent in October and a further 19 per cent in January.

There have been calls to the UK Government to intervene further than than the cost of living payments that are scheduled.

This comes as inflation hit 9.4 per cent in June, the highest its been in 40 years. This pushes the prices of food and every day essentials up. With this, the UK is in the grips of a cost of living crisis.

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There are a variety of reasons why we are now in this position and why energy bills are so high as the pandemic, demand issues and a war in eastern Europe brewed a perfect storm.

To reflect the fluctuating gas prices, Ofgem are changing the price cap every three months, rather than every six. They say it is to help households avoid nasty surprises on the bill.

Wholesale prices 2021 spike

Back in September 2021, we saw energy wholesale prices spike as we hit the first wave of the energy crisis with over 30 firms folding under the pressure. This was due to a supply and demand issue.

Then we saw the highest spike in gas wholesale prices in around 13 years in the wake of the pandemic as there was a lack of energy supply due to the high demand in Asia for Liquified Natural Gas (LNG).

Natural gas transported globally by ship, means less LNG than expected has reached Europe and some essential maintenance projects were rescheduled from 2020 due to coronavirus coincided with necessary scheduled projects in 2021, while weather events in the US have adversely affected their LNG exports to Europe.

Responding to this, the UK Government said: "High gas wholesale prices have subsequently driven an increase in wholesale power prices this year.

"In recent weeks, this trend has been exacerbated by the weather and planned maintenance at some power stations. This has resulted in unusually low margins for this time of year. These factors have combined to cause spikes in wholesale electricity prices, with a number of short-term markets trading at, or near, record levels."

As a result, the price cap in October 2021 increased adding £139 to the average yearly Direct Debit bill - this was record breaking for the time. And now millions will be wishing the price jumps were only that high.

Energy firms collapse

Energy providers couldn't keep up with the rising costs and around 31 firms around the UK collapsed, bringing the competitive sector nearly to halt.

Major energy companies survived and picked up the lost customers as Ofgem designated millions of homes to remaining providers. However, there were no deals and prices remained high.

Russia invades Ukraine

While millions of homes around the UK were already concerned about energy prices, costs spiked again to unprecedented amount as Russia invaded Ukraine on February 20, 2022.

The conflict between Russia and Ukraine threatened the gas supply from Russia into Europe and wholesale prices jumped even further and pushed the April price cap up by 54 per cent.

In July 2022, Russia restricted the amount of gas through the Nord Stream 1 pipeline to Germany. The Kremlin-backed energy centre Gazprom has blamed it on a maintenance issue in Germany involving a turbine.

While Britain typically received about four per cent of gas from Russia, there is a concern that there will have to be a rationing system put in place in Europe. Gemma Berwick, senior consultant at Energy Retail and Utilities management consultancy BFY warned that “any further drops in flows will cause further price increases”.

The UK is still heavily linked with Europe by pipelines, and is reliant on it to secure LNG cargoes. As a result, prices in the UK are closely correlated with those on the European continent.

As the war rages on, and inflation rate isn't expected to fall, energy prices are expected to rise even further with the average annual bill reaching £3,582 in October and £4,266 in January. Although energy regulator Ofgem has urged "extreme caution" over predictions for January.

Financial experts are urging the UK Government to intervene as millions are expected to fall into fuel poverty.

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