Why is there an energy crisis in the UK? Impact on gas and electricity prices

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

Gas and electricity bills have rocketed in the past few years. This energy crisis has driven the worst UK cost of living crisis in a generation. In this piece, we explain the causes of the crisis and how it’s affected our bills.

Arguably beginning in October 2021, when the Ofgem energy price cap was set at £1,277, the energy crisis has been with us for more than two years. While prices have come down from their peak, they still remain £100s above their pre-crisis levels.

On 1 January, the Ofgem cap rose 5% to £1,928 for a typical household. While energy prices are expected to go down over the course of 2024, they will still be much higher than they were in early 2021. We regularly collate the best deals available on the market in our energy comparison guide. If you’re struggling to pay for your gas and electricity, visit our guide to energy bill help.

Why are wholesale gas prices high?

The squeeze on global 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 ongoing 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 since it started in February 2022. 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. Most of the hike came as a result of concerns that the Israel-Palestine war would turn 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 led to the 5% rise in the January Ofgem energy price cap.

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

When will the energy crisis end?

Wholesale prices have gone down to the extent that household energy bills could drop 14% in April, according to the latest Cornwall Insight forecasts. This is because Europe has higher than expected gas reserves.

Bills could also continue to fall as the UK reduces its usage. National Grid statistics show the UK’s gas use fell in 2023 to its lowest level since 2015. See our top energy saving tips to see how you can save money by cutting your usage.

Cornwall Insight forecasts that wholesale power prices will continue to fall gradually over the coming years. But it added that it expects them to remain above historic averages until at least 2030. Of course, prices could spike again if there are any new major conflicts or disasters.

What does the energy crisis mean for my 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

At the moment, while there are some fixes below the Ofgem price cap, none of them can compete with the expected April cap.

Our advice is to consider any deals that come in around 10% below the January price cap 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. If you don’t expect you’ll be moving off the Ofgem cap anytime soon, it’s worth considering E.on’s price cap tracker tariff, which guarantees to beat the bills limit for a year.

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.