Why are energy prices rising?

March 22, 2022

DBS Sports Fund

Since late 2021, the price of gas has risen to unprecedented levels, due to a domino effect of separate reasons that has led to this rise. The prices of gas have more than quadrupled over the past year, on the 1st of February 2021, the price of gas was 48p/therm and on the 24th of January 2022 the price has risen to 210p/therm.

These changes in energy prices are nothing new, as the energy market is extremely volatile, unpredictable and can be changed by several variables, but these changes are nothing like we have seen before, so let's explore some of the reasons why this is happening…

 

Low gas reserves in the UK

The UK has some of the lowest gas reserves in Europe, our capacity for storage is around 2% of our annual demand, this is because the government wanted to save money and rely on luck rather than investing in our storage. Many other countries store between 25% and 37% of their annual demand, meaning the UK rely on other countries when there are shortages. Although it is rare that there are worldwide shortages of energy, it is a huge burden we carry, as we have discovered in recent months.

 

High demand across Europe and Asia

During the summer of 2021, many countries started to lift covid restrictions and businesses could start to operate once again. This created a huge and sudden increase in energy demand and in turn caused a steep rise in the price of energy. Along with this increase in demand, there were record low winds during this time, which means there was less energy created and therefore more strain was put on natural gas supplies.


Along with high demand in Europe, Asia’s use of natural gas was much higher than usual last year, therefore there was less natural gas available to be shipped to Europe, creating an even larger strain on our reserves and an increase in price. This is a great example of the effect other country's usage can have on the rest of the globe.

 

The Ukraine and Russia Conflict

Gas prices can be affected by many things that happen around the world, especially an involved country is a supplier of gas and electricity to other countries. Russia is the world's largest natural gas exporter, although it does not export gas to the UK directly, the ripple effect of them constricting supply to other countries in Europe will affect the UK massively, as so many countries rely on the energy they provide.

 

The Price Cap:

The price cap has been spoken about a lot during the past few months, for domestic customers it has been a saving grace, making sure prices for households are not too high, although the price cap has been increased and is the highest it has ever been by a long way.

On the other hand, for business customers, there is no price cap, meaning they will face the brunt of the energy crisis, with some companies receiving a price increase of over 100%.

The energy industry can be very hard to understand and navigate for the regular person, even when researching, it can be difficult to wrap your head around all the information being thrown at you. So having someone to guide you through the process and give you all the information you need to save money and energy is imperative. Get in touch with our team of energy experts today to save money time and stress.