Why is there an energy crisis in the UK? Impact on energy prices explained

A smart meter display with flames rising in the background (images: Getty Images)

Energy bills have rocketed in the past few years off the back of the energy crisis. It has driven up prices and seen a host of suppliers go bust while competitive gas and electricity deals all but disappeared.

In October 2021 the Ofgem energy price cap was set at £1,277. That meant a typical house with average energy use would spend around £1,277 a year on their bills (although, if you use more energy your bills will be more expensive).

Two years’ later and the price cap is £1,834 per year (£1,923 from January 2024). While this is lower than the rate of previous price caps and the Government’s Energy Price Guarantee (EPG), it remains £100s above where energy bills were pre-crisis.

While energy prices are expected to fall somewhat over the coming year, they will still get nowhere near the level they were in 2021. If you’re already struggling to pay for your gas and electricity, visit our guide to the energy bill help that is available.

To help you understand why your energy costs have gone up, we have taken a look at what has led to this energy crisis in the UK and what may happen next.

Why are wholesale gas prices high?

The squeeze on gas supplies has been a major driver of the UK cost of living crisis. It has increased wholesale prices for both gas and electricity, which in turn have been reflected in the prices we face from suppliers.

In recent years, the UK has become increasingly dependent on imported gas as North Sea reserves have dwindled. At the same time, getting hold of the fossil fuel has become more difficult due to two key reasons.

First, demand spiked in the wake of the Covid-19 pandemic. As nations came out of their various lockdowns and rebooted their factories and offices, demand outstripped supply. This forced prices up around the globe.

But the post-Covid surge in demand is no longer the primary factor behind our high energy bills. The fallout from the Russia-Ukraine war has now overtaken it. The war has impacted how much gas can be obtained from Russia, which has led to another surge in international gas prices. While prices have come down from the highs seen during the first year of the war, a continuing lack of global supply has kept prices above where they were pre-energy crisis.

A knock-on effect of the situation with Russia has been jitteriness in the markets when it comes to surprise geopolitical events. Anything that could restrict supplies causes prices to rocket.

For example, wholesale prices spiked in October and early November. It came largely as a result of concerns that the Israel-Palestine war may develop into a wider conflict in the Middle East. The region contains some of the world’s biggest natural gas producers, such as Iran and Qatar, so a war there would greatly tighten global supplies. This situation has cooled, so prices are now falling again. But they could yet rise again if there are any new major conflicts or disasters.

The UK has been badly hit by these global issues because of its energy infrastructure. Its reliance on gas imports, thirst for gas for use in heating and electricity generation, and lack of sufficient storage have all meant we have been particularly exposed to the worst of the wholesale price hikes.

What does this mean for my energy bills?

Wholesale prices ultimately feed into how much our monthly energy bills cost. This is particularly the case at the moment because most households are on standard variable tariffs (SVTs) that are set by the Ofgem energy price cap.

The cap was introduced before the energy crisis in 2019 as a way of limiting energy suppliers’ ability to profit from households not switching tariffs. People who didn’t switch tended to be vulnerable consumers, so the Government felt compelled to better protect them.

However, when wholesale prices soared in 2021 and energy suppliers went bust, the surviving providers stopped offering new fixed tariffs. It meant the majority of households were forced onto SVTs over the following year and were therefore at the mercy of the energy price cap.

Wholesale price changes are now passed on to us through the energy price cap. Prices feed through at a delay of more than a month because Ofgem bases its calculations on average prices for the three months up to its quarterly announcement. Here are the dates it will use to work out upcoming price caps:

Ofgem energy price cap dates Price cap announcement date Wholesale prices assessment period
1 October to 31 December 2023 25 August 2023 19 May to 17 August 2023
1 January to 31 March 2024 23 November 2023 18 August to 15 November 2023
1 April to 30 June 2024 23 February 2024 16 November 2023 to 15 February 2024
1 July to 30 September 2024 28 May 2024 16 February to 16 May 2024
1 October to 31 December 2024 27 August 2024 17 May to 16 August 2024

It’s also worth noting that energy bills will be higher for many households over the coming months than they were last winter. This is because the government has not announced a successor to the £400 energy bills grant that all UK homes received throughout the colder months between 2022 and 2023.

Finding the best energy deal

Since the start of October 2023, when wholesale prices surged due to the Israel-Palestine conflict, fixed deals below the existing Ofgem price cap disappeared from the market. However, there are some that sit below January’s cap.

With bills expected to be lower than January’s cap later in 2024, it’s worth holding fire on considering a switch at the moment. It is only worth switching to a fix now if you want cost certainty – ie, you want to know exactly how much your bills will be over the next 12 months to help you budget.

The main way to cut your energy bill is to reduce your gas and electricity usage by as much as possible. There are also several tariff options that can help you to save if you can be flexible with your energy use, such as Octopus Agile and Octopus Tracker.

Which energy companies have failed?

The energy crisis has led to dozens of energy suppliers going bust. According to Ofgem, as of March 2023 there were 21 domestic gas and electricity suppliers in the UK – down from 62 five years before. Some of the biggest names we have lost include:

  • Bulb Energy
  • People’s Energy
  • Igloo Energy
  • Utility Point
  • Green Network Energy

Out of these, Bulb Energy was the biggest failure as it had 1.7 million customers. Because of its size, the government took over control of Bulb before selling it to Octopus Energy in early 2023.

These suppliers could not charge customers more than the cap, and so had to take on the rising cost of wholesale energy themselves. With the cost of natural gas rising substantially, many suppliers simply could not keep themselves afloat.

If your energy supplier goes bust you will still receive gas and electricity while Ofgem moves you to a new provider. If Ofgem cannot find a new provider it will appoint a temporary ‘special administrator’ to the failed energy firm. Industry rules mean affected customers will not lose money owed to them. Any new company is also responsible for taking on any credit balances the customer may have.