Why energy bills have gone up

We all tend to respond to price rises with a sharp intake of breath.

Whether it is increases to your shopping bills, your mortgage or your car insurance, no-one wants to hear that they have to pay more for life's essentials.

The same is of course true for energy bills.

Energy is not a purchase that many people get excited about.

It is unlikely that you woke up this morning and thought, "I know, I'm going to buy some energy today".

However, it is an essential for all of us, so clearly the current interest in the energy industry and the concern around the recent price rises we have seen comes as no surprise.

Therefore it is important to take a look at the history of energy in Britain and why we are seeing this period of price movements.

The Good Life

Since the 1960s, we have been fortunate to have been self-sufficient, due to having our own supplies of North Sea gas. The Good Life, you might say.

"Competition between suppliers introduced a downward pressure on prices"

Because there was no need to buy gas abroad, we have consequently enjoyed a history of very low energy bills.

When the market was fully deregulated towards the end of the 1990s, competition between suppliers introduced a downward pressure on prices which continues to this day.

This has helped to keep prices here lower than in Europe where consumers have little to no choice of supplier.

A new picture

The picture today is somewhat different though, since our market has increasingly been exposed to global pressures.

Global economic growth, geopolitical issues and our own dwindling North Sea reserves have meant that energy companies in Britain have to buy more gas from European wholesale markets, where prices are higher.

European gas prices are also linked to oil prices, and we have all seen at the pumps that petrol prices have increased in recent years.

While this picture may look rather bleak, there has been significant investment in generation plants and infrastructure to enable more gas to be imported.

This means that the lights will be kept on in the future.

Recent price rises have followed a period at the end of 2007 where the country was a net importer of gas from abroad, whereas it was a net exporter in the same period of 2006.

We are using 5% more gas now than at the end of 2006, and at the same time we have seen the price of oil exceed $100 a barrel, the price of coal double and the EU price of carbon climb by a further one euro per tonne.

Cost of regulation

While companies in Britain are facing these external pressures, legislation closer to home is having an impact too.

"If you have not switched before, it is estimated that you could save up to 20% on your energy bill"

The cost of the compulsory energy efficiency scheme for suppliers (the Energy Efficiency Commitment or 'EEC') will rise from £700 million over the last three year period, to £2.75 billion from this April, when it becomes the Carbon Emissions Reduction Target (CERT).

The cost of the Renewables Obligation (RO) on suppliers has also risen.

Taking into account the increase in the European carbon trading scheme, the new CERT scheme and the increase to the RO, Ofgem has calculated an increase to all customers' bills of around £80.

These costs are all in addition to the wholesale cost of gas and electricity, which makes up the bulk of a domestic energy bill.

All these factors have unfortunately come together in recent months to make it necessary for some suppliers to raise their prices.

Taking action

While the current financial climate affects us all, it is important to know that there are actions you can take as a consumer to alleviate the discomfort of rising energy bills.

The competitive domestic market in Britain means that all energy users are able to choose between a variety of different deals for their home.

If you have not switched before, it is estimated that you could save up to 20% on your energy bill.

It is easier than ever to switch energy supplier and thousands of people in Britain do so every week.

Insulating your home effectively and switching off appliances that are not in use are two simple measures that can dramatically reduce your bills.

And while switching supplier and reducing our use of energy can help most of us to save money, companies recognise that rising energy bills can be particularly worrying for some customers.

This is why energy companies have also increased the help they provide to low income customers.

All energy companies have packages of help for anyone having trouble paying their bills, from grants for free insulation, to winter rebates and special discounted tariffs.

If you are having difficulties with your energy bill I would urge you to get in touch with your supplier because there will be ways in which they can help you.

The energy companies are also working closely with Government to ensure that help gets to those who need it most.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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