How to navigate rising energy costs
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Since summer 2021, the cost of energy in the UK has soared. One report suggests that £38bn extra may be added to UK household bills in 2022 – equivalent to an extra 6p on the Basic Rate of income tax. Why are energy prices rising? How does the UK regulate prices, and what might the new energy landscape mean for keen investors? Our financial planners at Castlegate look at these questions more closely, below. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Ofgem and the Default Tariff Cap
The Default Tariff Cap places a limit on how much energy companies can charge customers for gas and electricity. It is set by Ofgem – the UK’s energy regulator – independently from those in government. Almost all energy suppliers charge at/near this limit. When the cap is “raised”, this means suppliers can charge more.
According to a Uswitch poll, 63% of customers do not understand how a change in the price cap affects their finances. Here is the key thing to know. Those not currently on a fixed deal (and those who need to switch to a new supplier due to company closure) will likely see their energy bill go up if the cap is raised.
Those on a fixed deal will be protected until their deal ends. Conversely, if prices go down then fixed deal customers cannot easily switch (to get a cheaper deal).
If price projections hold true, most of the UK’s 28.5m households will see their annual energy bills exceed £3,000 from October.
Why are energy prices going up?
Ofgem has announced that the energy price cap will rise by 54% in April 2022 – i.e. an average increase of £693 per year, for 18m households. The Government has offered a council tax rebate to offer England residents a “discount” from April, if they are in bands A-D.
There are many reasons why energy prices have risen. In 2021, Europe faced a particularly cold winter which used up a lot of gas storage, thus driving up global demand (and prices). In Asia, demand also rose – especially in China. There was also less wind to generate electricity in the summer of 2021, causing many European countries to lean more heavily on gas to meet national consumption needs.
Finally, Russia’s invasion of Ukraine has also driven up prices. As the world’s largest natural gas exporter, sanctions on Russia (and announcements by the UK, US and Canada to stop Russian gas imports) have driven up global prices.
Are energy firms collapsing?
When Ofgem initially raised the price cap in October 2021, dozens of energy prices went bust. These companies needed to buy gas (wholesale) and sell onto customers, and most have low profit margins. When prices went up, therefore, many firms could not afford to buy the gas that customers needed – whilst remaining profitable. At least 27 companies have collapsed as a result, and more could follow this year.
If your energy company collapses, then Ofgem will appoint a new supplier to take over your account. Those on a fixed deal, unfortunately, would be put on a new deal – where they are likely to face a higher price (due to the new cap). For instance, the 176,000 households which were registered with Together Energy were moved to British Gas. The largest supplier to bust was Bulb Energy, which had 1.7m customers.
Should I invest in energy?
With energy prices rising, many keen investors are asking whether 2022 is a good time to “jump on the bandwagon” and invest in oil, gas or other areas of energy. However, we strongly caution against trying to “time the market” in this way. The reality is, by the time you hear that energy is going up, this has already been priced into the market by investment managers and institutions with more ready-access to market information.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
