There’s a perception that firms in the energy sector are quick to put up their prices when costs rise but slow to bring them back down again when costs fall or that they are exploiting the current market turbulence at the expense of the consumer. The situation is, however, more complex.
While consumers are understandably wondering why they aren’t seeing cheaper energy bills when the news is littered with stories about falling energy prices, there are valid reasons for this.
“Energy suppliers buy their energy for delivery at different times throughout the year, and sometimes up to 12 or 18 months in advance through hedging,” Daragh Cassidy of price comparison website Bonkers.ie says.
“So the price households pay for their gas and electricity is usually an average price of the cost of energy on wholesale markets over the course of around a year or two,” he says. In other words, you can’t draw a direct line between the wholesale prices and retail ones.
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Also while firms here announced a sequence of energy price hikes last year, they didn’t pass on the full extent of the wholesale price rises.
Take the price of natural gas, it used to trade on wholesale markets at roughly 50-60p a therm (we get most of our gas from the UK hence the sterling quote) before Covid and before Russia’s invasion of Ukraine. At the height of the energy crisis last year, it traded at 10-12 times this level. It reached a peak of nearly 800p a therm late last summer.
While energy prices for consumers have risen substantially, no one’s bill has risen by this sort of multiple. So you could say suppliers shielded households from the full extent of the wholesale price hike. In some cases firms used the additional revenue from electricity generation to subsidise their retail units.
Also while prices are falling and have returned to pre-war levels, they are still elevated. Natural gas is still about 130p per therm, more than twice the pre-Covid level. This is because prices were at record highs to begin with (at the start of the war). If the war component of higher energy prices has gone, for the moment, the Covid surge is still with us.
