Media outlets have reported that gas prices in Europe have fallen to below the level they were at the outset of Russia’s invasion of Ukraine.
However, domestic energy prices have remained high in Europe and consumers continue to face higher bills.
Ferret Fact Service explains why.
How have gas prices changed?
Media reports looked at Dutch TTF Natural Gas Futures, which is used to benchmark gas prices in Europe. On 28 February, it was trading at around £41 per megawatt hour, its lowest level since 2021.
Prices hit their peak of more than £300 in August 2022 as traders rushed to secure supplies for winter and the gas supply reduced from the Nord Stream pipeline amid the fallout from Russia’s invasion of Ukraine.
Why have they fluctuated so much?
Wholesale gas prices significantly increased from the middle of 2021 as the world emerged from the Covid-19 pandemic. Prices increased as production struggled to keep up with this increased demand for gas across the world.
A series of disruptions in supply were also blamed for spiralling prices, as well as colder than average weather.
Russia’s invasion of Ukraine in February 2022 had a large impact on supply as many countries reduced or ended their supply from Putin’s country, which is one of the world’s biggest suppliers of gas.
This continued throughout 2022 hitting a peak in August of that year.
The recent reduction in prices has been attributed to unusually warm weather reducing the demand for heating and Europe’s efforts in rebuilding gas supplies across the region.
How does this affect domestic energy bills?
Britain imports much of its gas from outside the country, so is affected by changes to the global energy market. While the UK doesn’t import much directly from Russia, it’s exposed to the knock on effects of global gas demand and supply.
Britain’s energy suppliers buy from the wholesale market, and use various methods to guard against the regular fluctuations in market price.
Energy bills in the UK are regulated by the Office of Gas and Electricity Markets (Ofgem), which sets a price cap based on analysis of energy markets and supplier costs. They do not regulate the oil and gas production industry.
Ofgem also sets a maximum supplier profit margin (before interest and taxation) of 1.9 per cent, based on estimates.
However, many energy companies make much of their money from energy production and trading rather than supplying to the consumer, so high wholesale prices can increase their profits.
The Ofgem price cap doesn’t put a limit on your bill, but puts a maximum on the amount energy suppliers can charge per kilowatt hour (kWh) of usage. Your final bill depends on how much energy you use.
In 2022, the price cap rose significantly as wholesale gas prices increased, leading to massive increases in domestic bills. The UK Government put in place the “energy price guarantee” to combat this, which limited average energy bills to around £2,500 a year until 31 March 2023 and around £3,000 a year until 31 March 2024.
If the price cap goes higher than the energy price guarantee level, the government subsidises the difference by paying suppliers.
There is also the energy bills support scheme (EBSS) which gave energy consumers a £400 discount on energy bills over winter 2022 to 2023,
The falling prices should eventually have a knock on effect on the cost of domestic energy bills, however the impact is not immediate.
This is due to the way suppliers buy their energy. Prices in the market can be very volatile, so suppliers buy energy for future use, sometimes up to years in advance. This is called “hedging” and allows suppliers to account for changes to prices and plan ahead for costs which arise.
On Monday, Ofgem announced a new price cap of £3,294, a reduction from the current cap of £4,279.
However, because the energy price guarantee is to rise to £3,000 at the start of April, typical customer bills will rise to that level.
Reductions in gas prices should theoretically be reflected in bills more quickly in future as Ofgem has moved to setting the price cap four times each year rather than two, allowing it to react to market changes faster.
Photo credit: iStock/Axel Bueckert
