Your energy bill is set to rise

Your energy bill is about to get more expensive. It will happen this winter. On 9 September, the wholesale price for British gas reached its highest point in four years, a surge that will inevitably be passed from energy traders in the City of London directly to households across the country. Experts have warned about it. The increase means the financial pain felt during the post pandemic inflation shock is not yet over for millions of families, many of whom are already struggling with mortgage repayments and the rising cost of a weekly shop. Winter approaches. The bills will follow. This is not a prediction. It is a certainty. The complex mechanisms of the energy market mean today's high wholesale costs are locked in, creating a delayed but unavoidable impact on the amount you pay for heating and light several months from now.

The effect on your bank account will be significant. Consider the current situation. A typical household, one using an average amount of gas and electricity, currently pays an annual bill set by the regulator’s price cap, which is already a substantial outgoing for most people. Wholesale prices make up the largest component of that bill, often accounting for half of the total cost, so a sharp rise in the markets has a direct and punishing mathematical consequence. The price just jumped. While the exact figure will depend on market volatility over the coming weeks, energy sector analysts are now modelling scenarios that would see hundreds of pounds added to the typical annual energy bill just as temperatures begin to fall. That is money many do not have.

This is not the first shock. The four year peak reached on Wednesday returns prices to a level not seen since the major energy crisis that gripped Europe, a period that forced the government into providing billions of pounds of support for households. The causes then were different. The results feel familiar. Back then, the problem was a sudden geopolitical event which choked off supply lines almost overnight, causing an unprecedented scramble for resources that sent market prices to historic, eye watering levels. This time, the reasons are more complex, a slow burning combination of rising global demand and constricted supply that has been building for months before this week’s acute spike. The outcome for your finances is the same. More money will leave your account. Less will be left for everything else.

A supply crunch meets rising demand

The reasons for the price surge are not mysterious. They are basic economics. Demand for natural gas is rising sharply across the world. Supply cannot keep up. When more people want to buy something that is becoming scarcer, the price inevitably goes up, and that fundamental market principle is now playing out on a global scale with a commodity that heats millions of British homes. The price spike is the result of three specific market pressures colliding at once, a dangerous convergence of resurgent demand, squeezed supply and worryingly low reserves.

First, consider demand. The economy is waking up. After years of pandemic induced disruption and suppressed activity, factories from Shanghai to Stuttgart are firing up their production lines and consuming vast amounts of power. People are travelling again. Businesses are reopening. This global economic resurgence, while welcome, requires huge quantities of energy, and natural gas is a primary fuel for both power generation and heavy industry. Countries across Asia are buying up supplies on the international market to power their own recoveries, creating intense competition for a finite amount of available fuel. Britain must compete. It is a global auction. The UK often loses.

This rising demand is meeting a tight supply. Much of that supply is liquefied natural gas. LNG. This is natural gas cooled to minus 162 Celsius, a process that shrinks its volume 600 times and allows it to be shipped across oceans in vast, specialised tankers from producers like Qatar and the United States. The UK has become ever more reliant on these shipments to supplement its own declining production from the North Sea, connecting British homes to a volatile global market. The problem is simple. Global LNG supply is constrained. Building the huge, complex facilities required to liquefy gas takes billions of pounds and many years, so supply cannot simply be switched on to meet a sudden surge in demand. Many existing producers have also locked their output into long term contracts, often with Asian buyers, leaving fewer spare cargoes available on the spot market for countries like Britain. Every tanker is precious. They choose where to go.

The third factor is storage. It is an insurance policy. Gas storage facilities act as a buffer, allowing suppliers to build up reserves during the summer when demand is low and prices are cheaper, and then draw from them in winter when households turn up their heating. But European storage levels are low. In some countries, they are critically low. This follows a long, cold winter last year which depleted reserves, combined with a summer of high prices which made it uneconomical for companies to refill the facilities to their usual levels. The UK has one of the lowest levels of gas storage capacity in Europe relative to its demand, having closed its largest site, the Rough facility, in 2017. This lack of a safety cushion makes the British market exceptionally exposed. There is no buffer. When a cold snap hits, suppliers must buy gas on the open market, whatever the price that day.

From the North Sea to your smart meter

The price of gas on the global market is not the price you pay. Not immediately. A long and complex journey separates the trading screens in the City of London from the smart meter in your hallway, a journey controlled by the energy regulator, Ofgem. Its main tool is the energy price cap. This is not a cap on your total bill, which will always depend on how much gas and electricity you actually use, but a limit on the rates your supplier can charge per unit of energy. It is a safety net. It protects about 29 million households. The cap applies to customers on a standard variable tariff, which is the default tariff people are moved to when their fixed term deal ends.

Ofgem’s role is to calculate what it costs a typically efficient energy firm to supply you with power. It is a formula. The single biggest component of this calculation, making up roughly half the total, is the wholesale cost of energy. Ofgem does not just look at the price on a single day. Instead, it monitors wholesale prices over a specific ‘observation period’ lasting several months. The price cap is then updated every three months, on 1 January, 1 April, 1 July and 1 October, using the data from the preceding observation period. This creates a delay. A lag. The prices being paid by suppliers today are not the prices being used to set the current cap on your bills.

This time lag is why the wholesale price surge on 9 September will not cause your bill to jump tomorrow. The cap for the period from October to December 2026 was calculated using much lower wholesale prices from the observation period that ran from late May to late August. The bad news is unavoidable. It is simply postponed. The record high prices seen this week will be captured by Ofgem’s next observation period, which runs from late August to late November. They will be baked into the calculation for the price cap that comes into force on 1 January 2027. That is when the pain arrives.

This system is designed to reflect the reality of how energy suppliers operate. They do not buy all their gas for winter on the day it is needed. That would be ruinously risky. Instead, they buy energy in advance, sometimes months or even years ahead, a practice known as hedging. This allows them to lock in prices and protect themselves, and their customers, from sudden, extreme price spikes. The price cap formula is designed to accommodate this practice. But hedging only smooths the peaks and troughs. It cannot defy gravity. When wholesale prices stay high for a sustained period, as they are doing now, those higher costs will inevitably flow through the system, past the hedging strategies, into Ofgem’s calculation, and onto your bill. The cap delays the shock. It does not absorb it.

Producers profit while households pay

A market is a transaction. Every transaction has a winner and a loser. In this one, the winners are obvious. It is the producers. Companies that extract natural gas are now selling the same commodity for a price not seen in four years, a direct consequence of tight supply and resurgent global demand. For the global corporations that pull gas from the North Sea or ship it as liquefied fuel from terminals in Qatar and the United States, a price surge of this magnitude represents a vast windfall. Their costs of production have not changed. The market price for their product has detached completely from the expense of getting it out of the ground. Higher prices flow straight to the bottom line. This means higher revenues, wider margins and, ultimately, enormous profits for shareholders. They are selling a basic necessity into an inelastic market. They are price makers.

The losers are just as clear. It is everyone else. The money flowing into the accounts of gas producers is flowing out of the pockets of ordinary people. Every pound added to a quarterly profit statement is a pound that a household can no longer spend on food, transport or clothing. For millions of families, a steep rise in the cost of heating and electricity is not an inconvenience to be absorbed by cutting back on luxuries. It is a direct threat to financial stability, forcing impossible choices between warmth and other essentials. The impact is not distributed evenly. Lower income households spend a far greater proportion of their budget on energy, meaning the exact same price rise consumes a much larger share of their world. The pain is not equal.

Households are not alone in their misery. The damage spreads through the entire economy. It hits factories first. Businesses in sectors like ceramics, steel production, and chemical manufacturing, where energy can account for a third or more of total operating expenses, face an immediate and existential crisis when input costs spike without warning. They have two options, both bad. They can absorb the higher costs, destroying their profitability, cancelling investment and putting jobs at risk. Or they can attempt to pass the cost increase on to their own customers, which simply pushes the problem downstream and fuels wider inflation across the economy. Neither path is good. One leads to industrial decline. The other makes everyone poorer.

Some suppliers will not survive. The structure of the British energy market creates another set of victims during a price shock. Smaller, newer energy retailers, which often lack the vast capital and sophisticated trading desks of the legacy giants, are caught in a lethal pincer movement. They are forced by the price cap to sell energy to homes for far less than it now costs them to buy on the open wholesale market. This is not a business. It is a managed collapse. While larger, integrated companies can weather the storm using their own gas production as a natural hedge, smaller players are completely exposed. Their failure is inevitable. When they go bankrupt, their customers are transferred to a rival. This concentrates the market in fewer, larger hands, and the cost of the failure is eventually socialised among all bill payers. The system protects the giants. It culls the weak.

Westminster has few good options

The government is trapped. Every option is bad. Ministers in Whitehall must now make a choice, and it is a choice between policies that are economically damaging, politically ruinous, or both. They face intense pressure to act. They have no good moves left. The problem is not one they can solve, only one they can manage, and the cost of that management will be immense.

The most direct route is to give people money. This could take the form of flat payments, state backed discounts on bills or an expansion of existing support for the poorest households. It is simple. It is fast. It is also fantastically expensive. A universal subsidy to cushion the blow for every household in Britain would cost the Treasury billions of pounds, money it can only raise by borrowing more on international markets. This adds to the national debt, storing up a problem of higher taxes or reduced public spending for a future government to solve. It also does nothing to reduce demand, potentially pouring inflationary fuel onto an already burning fire by pumping cash into the economy while energy itself remains scarce. The alternative, targeting support only at those who need it most, is cheaper but creates its own political headaches, tangling ministers in complex debates about fairness and eligibility while leaving millions of middle income families unprotected.

The other path is a windfall tax. This is a raid. The logic is compelling to many. The same high prices hurting households are generating historic, unearned profits for gas producers. A one off levy on these profits could raise billions to fund support for households without adding a penny to the national debt. It is a politically attractive option, popular with voters and difficult for the opposition to criticise. The producers hate it. They warn that such a tax would be a devastating blow to investor confidence, making the UK a riskier place to commit capital. Billions of pounds earmarked for investment in new North Sea fields, carbon capture technology and offshore wind farms would, they claim, be diverted to countries with more stable tax regimes. It would be a short term gain for the Treasury paid for with the long term price of reduced domestic energy production and greater reliance on volatile global markets.

This is the choice. Subsidise bills with borrowed money, or tax energy producers and risk the investment needed for future security. One option mortgages the country’s future to pay for today’s heating. The other risks making the country colder and poorer in a decade’s time. There is no third way. There is no secret, painless solution that officials in the Treasury have overlooked. A global price shock has happened. The only question for the government is how to distribute the pain. It cannot make the bill disappear. It can only decide who pays.

Sources. Independent Business: Households facing winter energy bills rise as UK gas prices hit four-year high. Evening Standard: Households facing winter energy bills rise as UK gas prices hit four-year high.

Analysis. Drafted with AI assistance from the sources listed above and reviewed by an editor before publication. Jnews links to the organisations it writes about.