Ofgem’s Supplier Cost Index, which measures trends in wholesale gas and electricity prices, is around 15% higher in January 2017 at 91.2 compared to a year earlier when it was 79.4, due to increases in wholesale gas and electricity prices.
The steep rise started in the second half of 2016 after a long period of falling costs between the start of 2014 and early 2016 with larger reductions for gas than electricity.
Electricity prices saw a significant increase in October and November before falling back in December last year. This was caused by tighter forecast capacity margins in electricity generation, higher wholesale electricity prices in the French market, and higher commodity prices particularly for coal, according to the regulator.
As well as rising wholesale prices, the index has been pushed up by an increase in the expected charges to suppliers associated with government programmes, particularly those supporting renewable and low carbon electricity generation.
The regulator expects supplier costs to rise further during the year as the index currently excludes two measures that are due to be introduced. Capacity Market payments, introduced to help secure electricity supplies and the impact of the proposed exemption of energy intensive industries from payments for environmental programmes, which are expected to be introduced in April and October 2017.
The regulator however feels the rises in energy prices can be controlled to reduce the effect on consumers.
“It’s not obvious that there should be significant price increases across the market”, said Dermot Nolan, Ofgem’s chief executive.
Nolan said that the way suppliers buy gas and electricity, upto 18 months in advance, should soften the impact on their costs.
It went on to warn suppliers that if they did not keep their prices down they would lose customers to rival energy providers.