Do energy prices always rise when there is a General Election?

By May 11, 2017Energy Consultant

The claim: The government says energy bills are rising and it wants to introduce a cap on standard variable energy tariffs.

While prices have been rising recently, Mrs May is incorrect to suggest bills only ever go up. Energy prices are volatile and have gone up and down in recent years. However, there is a big difference in what customers pay depending on the tariff they have chosen.

Theresa May has said she wants to introduce a cap on standard variable energy tariffs to end the injustice of rising energy bills, which “only seem to go in one direction”.

How does this work?

Like other commodities, gas and electricity are produced and sold on the wholesale market before being sold to customers and this has a significant impact on household bills.  These wholesale costs currently make up about 50% of the average annual retail bill, according to Ofgem.

In the case of gas, the wholesale market involves the buying and selling of natural gas in the UK after it has arrived from offshore production sites, which include pipelines from other countries.

Last year, around 32% came from North Sea fields and 44% came from Norway. The UK has one price for wholesale gas irrespective of where it comes from. The electricity market works in a similar way.

Do price rises reflect costs?

Since the beginning of the year, the “big six” energy suppliers have announced price increases on their standard tariffs of around 2% on average for gas, but an average of over 10% for electricity.  Energy suppliers have blamed an increase in wholesale prices for the hikes as well as increasing costs of renewable subsidies.

According to Schneider Electric, from May 2016 to February this year gas wholesale prices rose by around 38% and electricity by around a quarter. But since then wholesale costs have fallen, 14% in gas and 12% in electricity.

Suppliers would argue that they usually buy their energy months or even years in advance so the day-to-day wholesale cost may not be reflected in what customers are currently paying.

Tories vow to end ‘rip-off’ energy bills

In the past, energy bills have fallen as wholesale costs dropped. For example the average annual energy bill for a standard variable tariff from the “big six” was £1,124 in January 2015 and fell to £1,098 the following year. According to the most recent figures, the average annual bill in March was £1,086, up £25 since the start of the year.

But as David Hunter from Schneider Electric points out, “there are always suspicions that domestic prices rise like a rocket but fall like a feather”.

While customers cannot control the wholesale market, one of the most effective ways of keeping bills down is the type of tariff signed up to.

More than two out of three customers are on standard variable tariffs rather than cheaper, fixed-term deals.

Ofgem says the difference between the average standard variable tariff and the cheapest available deal is as much as £250 a year.