Why are gas prices so high? What caused the UK shortage as wholesale costs rise to record levels

Energy firms are facing closure as a result of record highs in wholesale energy prices and a gas supply shortage.

The challenges faced by both giant and small fuel firms is expected to have a knock on effect on consumers, with millions of households across the UK braced for a spike in their energy bills.

As part of its efforts to address the issue and concerns, the Government is holding emergency talks with suppliers and Ofgem, while reassuring consumers that they will be safeguarded against the difficulties confronting the energy industry.

Why are gas prices so high?

Current high prices in the UK are a reflection of high gas prices globally.

As countries recover from the Covid-19 pandemic and reopen their economies, the demand for global gas has risen. Coupled with a cold winter, this has resulted in a gas market with reduced capacity.

Energy firms buy gas and electricity wholesale and with higher demand and limited supply, prices have shot up to record levels. Prices for wholesale gas are up 250 per cent since January, according to industry group Oil & Gas UK.

Scheduled maintenance projects rescheduled from 2020 to 2021 because of the pandemic, lower than usual gas supply from Russia and less liquified natural gas reaching Europe because of increased deliveries to Asia have also contributed to spikes in wholesale energy prices and uncharacteristically low supply.

How will this affect consumers?

More than 22 million households are connected to the gas grid and in 2020, 38 per cent of the UK’s gas supply was used for domestic heating and 29 per cent for electricity generation, meaning any effect of sharp rises in prices will be widespread.

Millions of households could see their energy bills rise by at least £139 a year and some households face losing their current energy suppliers altogether.

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If your energy supplier goes out of business, the energy regulator will move you to a new supplier and ensure your supply isn’t disrupted.

In addition to a rise in household energy bills, many are worried the crisis could exacerbate food shortages and even affect essential medical supplies.

Amid fears that price rises could leave some families forced to choose between food and fuel, the Government has sought to assure households that they will be protected and support will be available for those who face financial difficulties in heating their homes and paying their energy bills.

What effect is this having on energy firms?

Major energy firms have called for the Government to lift the price cap, which limits the rates suppliers can charge for default tarriffs and safeguards consumers against sudden rises in costs.

Smaller energy companies have said they risk going out of business, with four having already gone bust.

Peter McGirr, chief executive of small energy firm Green, told BBC Radio 4’s Today programme: “I feel that without any support mechanism being put in place by Government, it’s unlikely we will see the winter through.”

How is the Government planning to address rising gas prices?

The Government has said that it does not anticipate any increased risk of supply emergencies this winter. But it is working with gas suppliers to monitor the issue and is looking into providing state-backed loans to energy companies to help them survive. 

Business secretary Kwasi Kwarteng has held emergency talks with leaders in the energy industry and regulator Ofgem to discuss solutions to the problems energy firms are facing. 

The Government has also said its energy price cap will protect millions of customers from increases in global gas prices this winter. It has committed to supporting low income and fuel poor households with energy bills through the Warm Home Discount, which provides recipients with a £140 discount on their bills, winter fuel payments and cold weather payments.

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