In the past 4 years, gas prices have risen by 21%, petrol costs by 29% and electricity prices have increased by a monumental 25%. Collectively these three increases comprise a huge proportion of the overall consumer price rise in the country, and alarmingly they have soared at a rate that is seamlessly above that of inflation.
The reality of these statistics have provoked the Office for National Statistics to predict that over a third of the average consumers income is now being spent on daily essentials, with fuel costs playing a big part in this.
There is no doubt that fuel prices are a hot topic at the moment, with energy providers in particular under fire for raising their prices so frequently and heavily. As well as citing growing environmental demands, the primary reasons given by suppliers for recent price hikes have been raising wholesale prices and network distribution costs. With proposals being announced this week that address the issue of ‘green levies’, more attention should now be given to wholesale prices and network distribution costs, as these now remain as the sole reasons given for why prices are rising. But what exactly does this mean, and what factors are influencing these costs?
One of the key reasons behind energy prices rising is the growing demand for gas, which is now the UK’s largest source. As people require both gas and electricity for their homes, and gas is used to generate electricity, the state of the former has a huge affect on the prices of both collectively.
The key point to consider is that oil and gas prices are directly correlated, and an increase in the demand of one will inevitably push up the price of the other. This is because the fuel contracts between organisations are for long-term deliveries, and a necessary measure to counter fluctuating natural gas spot prices is to attach them to the more stable oil prices.
As such, external factors such as recent unrest in the Middle East, where Britain acquired a large portion of their imported gas and oil, have contributed to prices rising here on our shores.
In recent years, the North Sea has failed to provide the levels of resources that had present in the past and this has increased our dependency on the imported resources present in Asia. The reality of this situation is indicated in recent statistics that have shown that 45% of Britain’s demand for fuel is now subsidised by imported gas, compared to only 2% a decade ago.
Furthermore, areas such as China and India have also increased their prices for oil to over $100, with this figure rising dramatically over the course of the last 10 years.
As such, it can be argued that energy providers citation of rising wholesale prices should be given more credence than it has been afforded currently as the truth is that external factors are influencing how much they pay for their gas and oil.
Policy Vs Wholesale Costs
Two years ago, the Parliamentary Committee on Climate Change initiated a study that evaluated why exactly gas and electricity prices had risen so severely in the preceding 7 years. The organisation had been astounded by the 120% increase in gas prices during this period, and wanted to know why consumers were having to fork out almost £300 than they had done seven years earlier.
The Committee found that two thirds of the increase was done to genuine increases in wholesale energy prices, and identified that 20% of the rises was due to soaring network distribution costs. The same reasons were given for rising electricity costs, though intriguingly there was a disparity in the figure given for policy influences.
The committee determined that around 27% of electricity prices could be attributed to government policy towards environmental obligations, whilst with gas this was only 10%. Nevertheless, the study indicated that rising fuel costs were due to more than just wholesale prices, with network distribution and government policy clearly playing a part.
What can be done?
Wholesale prices are something that we in Britain have no influence over, and all we can hope for is a more stable climate in the country’s we import our fuel from. As the North Sea is starting to run thin on resources, we can no longer determine the price of our resources, so we have to accept in this department the government is blameless.
However, this begs the question why more is not being done to generate our own energy, rather than relying on other country’s to do so. Considering that we are a country with a rich history of being to provide our own fuel, this really is quite a pressing issue.
Sustainable energy is the key, and more renewable resource programs would ensure that our prices are not so vulnerable to external factors. Yes, the start-up costs are more expensive and yes green fuel is more costly at this time, but in the long term it could ensure a cheaper and more sustainable future.
Our reserve margin has now dropped to under 5%, indicating that clearly more can be done to ensure a more secure future.
In relation to addressing the impact of government policy on prices, recent proposals to roll levies back have arguably dealt with this sufficiently. British Gas and Npower have agreed to apply these savings to their customers, whilst the others (apart from EDF) have indicated that they will follow suit in the upcoming weeks. In this way the government can be applauded for impacting energy prices directly in the only manner available to them outside of direct intervention on profit margins.
The announcement by Npower to freeze its prices until 2015 is also promising, though they said this is dependent on whether wholesale prices and distribution costs increased. As such, the problem is still very much existent, because these account for the majority of the price rises in the last ten years.