Why are gas and electricity bills going up in April – even though wholesale prices have fallen?

Wholesale energy prices have fallen to their lowest level in 18 months, leaving many customers wondering why their energy bills are still so high.

Household energy bills are influenced by a number of factors, but the main one is the wholesale price of gas and electricity.

Both gas and electricity wholesale prices have fallen steadily since December 2022, but that fall has not been passed on to energy bills.

The price cap set by regulator Ofgem, which sets energy bills for more than 80 per cent of homes in the UK, is currently £4,279 a year, although the new price cap will be £3,280 a year from 1 April.

But the last time wholesale energy prices were this low was September 2021, when the price cap was £1,277 a year – a whopping £3,002 less than now, and £2,003 less than in April this year.

Here’s how the wholesale price of energy affects the bills consumers pay – and everything else you need to know about how these costs are calculated.

What are wholesale prices for gas and electricity?

Energy companies buy the electricity they sell to consumers from the companies that generate it. The cost at which they buy it is known as the gas and electricity wholesale price.

Wholesale gas prices in the UK are now around 123.5 pence per therm – a unit of heat – down from peaks of around 450p per therm in August 2022.

It’s a similar story with wholesale gas prices in Europe, which currently trade at around €49 per megawatt hour, compared to €272 last August.

Meanwhile, wholesale electricity prices have fallen from 548 pence per megawatt-hour in August 2022 to just 139 pence today.

Why do wholesale energy prices rise and fall?

Many things. First, supply and demand influence the price of wholesale energy.

Where the electricity comes from also affects the price. For example, the UK gets about 40-50 percent of its gas from the North Sea and has to import the rest, exposing us to large swings in European gas prices.

How much gas the UK has in storage could also affect wholesale prices.

Even the weather can change these costs. For example, on quiet days the UK produces less power from wind turbines, relies more on gas, driving up costs.

Even the strength of the pound against the euro affects wholesale energy costs. When the pound is strong, these prices fall and vice versa.

If wholesale energy drops in price, will my bill go down?

Yes, but not right away. The energy bills are based on wholesale prices, but not in real time.

That’s because wholesale energy costs fluctuate widely. To get around this, energy companies ‘hedge’ themselves by purchasing gas and electricity well before they are needed.

They can do this months – and even years – before they really need it.

It means that our current monthly bills do not reflect today’s prices, but rather the wholesale costs from when the supplier first paid for the energy.

So it may take a while for low wholesale prices to reduce energy bills. There are several ways to track wholesale costs, including the current price and the upcoming season, and they all need to drop to affect the utility bill.

That said, there is some hope that this is about to happen.

Ofgem chief executive Jonathan Brearley said the reduction in the Ofgem price cap from April “reflects the fundamental shift in the cost of wholesale energy for the first time since the start of the gas crisis, and while it won’t make an immediate difference to consumers, it is it’s a sign that some of the immense pressure we’ve seen in energy markets over the past 18 months is starting to ease.”

He added: “However, prices are unlikely to fall to the levels we saw before the energy crisis. Even with the extensive government support package currently in place, this is a very difficult time for many households across Britain.”

Energy analysts at Cornwall Insight believe the price cap will fall to £2,112.42 per annum for the July to September 2023 period, then rise slightly to £2,118.13 for the remaining three months of 2023.

There’s even a chance that cheap energy deals could be launched within weeks that are cheaper than the current £2,500 rates that most homes are saddled with.

What else determines the price of my energy bill?

Wholesale energy costs are only part of your total double fuel bill.

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.

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

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

VAT is self-explanatory: an additional tax that is added to bills.

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.