Wholesale energy prices have fallen 46% – why are gas and electricity bills still so high?

The price that energy companies pay for gas and electricity has fallen by almost 50 percent in a year, but the average consumer energy bill has risen by 26 percent in that time.

So if energy prices fall, why are consumer bills so high?

We call the price that energy companies pay for gas and electricity wholesale prices.

For electricity and gas, these prices are down 46 percent from last June to today, from 20.36p to 10.89p per kilowatt hour (kWh) for electricity and from 7.19p to 3.85p for gas.

These wholesale prices are falling due to high levels of domestic gas and liquefied petroleum gas being stored across Europe.

Yet the average household energy bill has risen by 26 per cent since last June, from £1,971 in June 2022 to £2,500 today.

The average home currently pays £2,500 a year for energy thanks to the government’s Energy Price Guarantee support scheme that caps how much households pay.

From July to September the average home will pay £2,074 for energy per year as the EPG will rise to £3,000 per year, but the Ofgem price cap will fall from £3,280 to £2,074.

There are three reasons why household energy bills have not fallen further.

First, wholesale prices are falling, but they are still high.

Robert Buckley, head of relationship development at analyst firm Cornwall Insight, said: ‘Even after the recent declines, wholesale prices are double what they are historically.

“That brought us down from six times the normal price to twice the normal price.”

Buckley also points out that winter energy bills would have averaged £4,279 had the EPG not capped bills at £2,500.

The second reason is that energy companies buy power long before it is needed, sometimes months or years in advance.

This ‘hedging’ helps to protect them – and consumers – against rapid fluctuations in energy prices.

In practice, this means that consumer energy prices can slowly fall when wholesale prices do.

The third reason why household energy costs are not falling further is that the cost of gas and electricity only accounts for between one-third and two-thirds of the bill, depending on the timing.

The rest is fixed prices to pay for things like the cost of running power companies and installing power lines.

Full cost: the consumer energy bill consists of various fees, including tax, ongoing costs and the cost of the government’s smart meter rollout

Pay network costs for the installation and running of gas pipelines and electricity cables. It also covers the costs of energy companies that have gone bankrupt. These costs vary depending on where in the UK you live.

Operating expenses pay for the costs of running an energy business, including sending bills and providing customer service.

Environmental and social costs pay for government changes in the energy market, such as the Warm Home Discount and the roll-out of the smart meter.

VAT speaks for itself: an additional tax added to bills of 5 percent.

Finally, other direct costs include things such as headroom. This is an extra margin that is built into bills and is intended to help energy companies pay surprise charges, but is ultimately paid for by consumers.

Last month we revealed that major energy suppliers have no plans to offer customers cheaper flat rates in the foreseeable future… despite the price they pay for energy falling.