Ever wondered why energy prices are so expensive? Green subsidies and the way in which wholesale prices are determined are to blame, our politicians explain.
High taxes and the "insane" way in which our energy is purchased from the wholesale markets are behind Brits' sky-high bills, politicians have claimed.
Conservative shadow energy minister Lord Offord of Garvel said in a House of Lords debate that UK domestic energy costs are "three times more expensive than the US", adding that taxes made up almost half of the typical bill.
"Only one-third of electricity prices in domestic bills are wholesale prices," he said. "46% of the total costs are the green levies and subsidies, which are being accentuated by the accelerated and self-inflicted rush to decarbonise the grid.”
While this will benefit the UK in the longer term as it is supporting the move to greener energy generation, bill payers are experiencing pain from it in the short-term.
However, although just over half of our energy is now produced domestically, the UK is still reliant on expensive foreign energy imports.
Supply and demand affect the price, which is balanced every half-hour by the National Grid. For example, there is more demand for energy at 5pm than 3am, and obviously more at certain times of the year, such as in the winter.
The greater the demand, the higher the price.
What’s more, other factors such as the oil price, currency fluctuations, the weather, shipping prices and political events affect the price of energy, as was seen in the early months of the Russian invasion of Ukraine.
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Energy price set by ‘highest cost generator’
Meanwhile, how purchasing from wholesale markets works also makes it more expensive.
The wholesale energy price is set at the highest cost generator, known as the marginal generation unit, in half-hourly trading slots.
This means the type of power that met the peak demand. So, for example, if gas meets the peak demand for energy, the energy price is set by the cost of gas.
If the peak demand for energy is met by coal, which is more expensive, then the price of coal sets the energy price instead.
In the same House of Lords debate on energy prices, chartered accountant Lord Vaux of Harrowden, called the process “bizarre” and said it was “one of the main reasons why electricity prices are so high.”
"If I need to buy 10 pints of milk, so I go to my supermarket, where they are 95p each but it has only nine, and then buy the 10th pint from the corner shop for £2, I do not have to go back to the supermarket and pay the difference so that all 10 cost me £2 each,” he said.
"That would clearly be insane. But that is exactly how the electricity wholesale market works.”
Lord Offord of Garvel called on Labour energy minister Lord Wilson of Sedgefield to “come up with a new plan for energy that is affordable for all."
In response, Lord Wilson said: "We have plans on the go to make everybody's energy bills cheaper. We need to move towards having energy that is essentially homegrown, as at the moment it is not.
"We need to move in that direction if we want to bring down bills, which is the target of this Government."
Energy cap set to fall in July
The good news is that the energy price cap is set to fall in July to £1,720. It previously increased to £1,849 in April. However, the bad news is that it is now set to rise again in October.
The energy giants have been setting out their predictions for what they think it will rise to.
Eon Next currently forecasts that dual fuel bill payers will be paying an additional £28, with an increase in the energy price cap to £1,748.
Meanwhile, rivals British Gas and EDF forecast the cap to rise higher – British Gas currently expects an increase of £45 to £1,765, while EDF expects a rise of £44 to £1,764.
How to save on your energy bills
So, how can we save on our bills?
Considering that none of these issues are likely to be resolved any time soon, one of the most effective things you can do is to sign up to a fixed energy deal to lock in your prices.
Uswitch estimates you could save as much as £222 a year by doing so. That's a saving of well over 10% on the typical annual energy bill, and it only takes a few minutes to do so.
We've teamed up with Uswitch to help you switch energy, but any comparison site will be able to offer you cheaper deals than the Energy Price Cap.
If you’ve already done that, then all that’s left is to try to reduce your energy use. A smart meter can help – your supplier should be able to install one in your home for free if you don’t already have one.
It can help you see how much energy you’re using in real time and set a budget.
Turning off lights and radiators in unused rooms, using the washing machine and dishwasher with a full load, drying clothes naturally instead of using a tumble dryer, and taking shorter showers can all help save on the bills.
Some energy suppliers, such as Octopus, also offer schemes to let customers know when prices are lower to encourage them to use their appliances then.
Find out more in our handy guide to saving energy.