Households face substantial rises in energy bills as the soaring cost of wholesale gas continues to spark chaos in the industry.
Several small energy suppliers have already folded with many more expected to cease trading in the near future and the Government doesn’t seem keen to offer state-backed loans to help keep businesses afloat during this crisis.
One of the main issues facing these providers is the low, fixed rate prices they have offered consumers which they now cannot uphold as wholesale prices have risen dramatically.
It is not yet known how long this will continue but experts have warned the number of suppliers in the market could be cut to as little as ten by the end of the year, down from 55.
To help you understand why prices have soared, how this will affect you and what you can do, This is Money has answered your most common questions.
Households around the country are likely to see an increase in their bills due to energy crisis
1. Why is there a shortage of gas?
The crisis has been sparked by a number of factors but ultimately is due to the lack of natural gas being produced as well as an increase in demand.
Demand has rebounded quicker than expected after the global pandemic but reserves have been slow to refill over this summer with supply from Russia less than predicted.
In particular, the Government said, there has also been high demand in Asia for Liquified Natural Gas (LNG), natural gas transported globally by ship which means less LNG than expected has reached Europe.
The circumstances have not been helped by last winter (2020 to 2021) being much longer and colder than normal.
There has also been a lower output from renewable sources such as solar power and wind, creating more reliance on gas.
2. How much have prices increased by on average?
Oil & Gas UK, an industry group, said wholesale prices for gas are up 250 per cent since January.
It added costs have also soared 70 per cent since August – highlighting the sharp increase in prices.
As wholesale costs rise, energy firms need to pay for them and, as a result, much of this cost will be passed on to consumers.
Several small energy suppliers have already folded with many more expected to cease trading
3. Why does this mean consumers bills will increase?
More than 22million households are connected to the gas grid and high gas wholesale prices have subsequently driven an increase in wholesale power prices this year.
Suppliers need to recoup their money in order to stay afloat and this will often come from customers.
Whilst many major energy suppliers purchase much of their wholesale supplies many months in advance, giving protection to them and their customers from short-term price spikes, others have not.
Therefore, several of the smaller energy suppliers failed to buy enough wholesale energy to keep supplying their customers at the, often low, rate they promised.
As a result, they either have to pass the costs on, if they can but if not, they may have to cease trading.
However, customers will not see a dramatic rise in bills and those on a fixed deal won’t see a change until their deal comes to an end.
The customers who may see an immediate increase are those whose fixed tariff is now coming to an end as they will have to find a new deal – many of which are much higher than in previous months.
Justina Miltienyte, energy policy expert at Uswitch, said: ‘A lot of electricity is generated by gas-powered plants, meaning there has been a similar knock-on effect on electricity supplies.
‘If you’re on a fixed deal, you’re protected from the rises in the market at least until your current deal runs out.
‘The energy price cap for customers on variable tariffs also means the cap will not increase as much as the wholesale prices but it will be reviewed early next year, so customers who are on variable tariffs should continue to be vigilant and keep an eye on the deals available in case the prices rise again next year.’
4. What happens to customers whose supplier has collapsed?
In the past five weeks, five suppliers have collapsed due to the problems in the industry.
For those who are with a supplier that has collapsed, they are advised by Ofgem to stay put and not switch away. The regulator will find consumers a new provider through the supplier of last resort system.
For example, Utility Point customers, who found out last week the firm had collapsed, have now been told they will automatically be moved to EDF.
Bulb seeks bailout
Bulb, the sixth largest energy supplier in the UK, is seeking a bailout to stay afloat.
The provider, which provides energy to 1.7million customers, is working with financial advisory company Lazard to help secure new sources of funding, according to the Financial Times.
It said a bailout could come as part of a joint venture or merger with another firm, with a further option being a cash injection from investors.
However, their new supplier will put them on a special ‘deemed’ contract meaning a contract they haven’t chosen and not the fixed deal they may have previously had.
Deemed contracts can be more expensive so bills could go up but Ofgem said it will try to get the best possible deal for customers.
Often, deemed contracts can cost more because the supplier takes on more risk, for example, they might have to buy extra wholesale energy at short notice for new customers.
Therefore, they charge more to make up for it. As wholesale prices are increasing as it is, these contracts are likely to be pricey.
An Ofgem spokesperson said: ‘We know that the current situation with high wholesale energy prices is putting pressure on customers and energy companies. This is a global issue.
‘We have the systems and processes in place to ensure that customer needs are always met.
‘For those customers who are with energy companies that can no longer trade, a new supplier will be appointed. Ofgem is working closely with government to manage the wider implications of the global gas price increase.’
High gas wholesale prices have driven an increase in wholesale power prices this year
5. Can customers still switch suppliers?
At present, households can still switch suppliers if they feel like they could get a better deal elsewhere.
Ordinarily, this would be the first piece of energy advice to households, but the switching market is not functioning properly at the moment.
Many comparison sites still have services running, but people may struggle to get competitive quotes, with restricted deals available, and may also fear that a new smaller supplier they switch to could go bust.
The uncertainty has led This is Money’s energy comparison partner, Compare the Market to state that it is unable to run its service at present. It said it will resume the service as soon as it is confident it can offer the ‘right’ comparison for customers.
You may still want to compare energy prices with other comparison sites, but This is Money’s advice would be to be cautious about switching right now, particularly to a minnow supplier.
If consumers are concerned their supplier might go bust, they can still switch now or wait and see what happens.
If the provider does fold, they will be protected under Ofgem’s Supplier of Last Resort process and moved to another supplier without losing any power.
Once they have moved provider, they can then switch to another tariff if they so decide.
Even if a supplier does go bust, customers should be reassured their energy supply will continue as normal and any credit balances they built up with those suppliers will be protected.
Ofgem added it has plans in place to deal with multiple supplier failures.
It said where the appointment of a Supplier of Last Resort is not possible, Ofgem and BEIS have agreed processes in place to appoint a special administrator to temporarily run the business until such time as a new supplier can be found for the customers.
6. When will this likely be resolved?
It is not yet known when the situation will be resolved as prices continue to rise.
It may be some months before the crisis has settled but by that point, it is likely there will be far less suppliers in the market.
In fact, some have predicted there will be as little as 10 trading by the end of the year.
Miltienyte added: ‘It’s hard to say [when this will come to an end]. The Government is taking the situation seriously and is working with suppliers and Ofgem to work out the best ways to support consumers, along with businesses and energy providers.’
Anyone who is concerned about being in debt to their supplier, should speak to them directly
7. What should customers who are worried about being in debt to their supplier do?
Anyone worried about being in debt to their supplier should contact their provider immediately.
They will be able to talk you through the available options and can offer advice.
It is also possible to speak to debt advice charities, such as Stepchange, who will be able to offer free, impartial assistance.
8. What help is available for households?
It is hoped the energy price cap will protect millions of customers from the sudden increases in global gas prices this winter.
This is despite its recent criticism after the level was increased by 12 per cent – the equivalent of £139 a year on average – bringing the typical annual cost to £1,277 a year.
However, it now seems that this could be a good move as many households, not on a default tariff, could be paying well over that sum.
Other schemes available to help include the Warm Home Discount which provides eligible households with a £140 discount – but customers have been encouraged to apply quickly before spaces run out.
Winter Fuel Payments are also available for those who get the State Pension or get another social security benefit.
Meanwhile, Cold Weather Payments are given to those whose average temperature in their area is recorded as, or forecast to be, zero degrees celsius or below over seven consecutive days.
Households will get £25 for each seven day period of very cold weather between 1 November and 31 March.
9. Will the energy price cap rise?
There has been no official word on whether the price cap will rise although it is understood several energy firms have asked Ofgem to increase it again to help with rising costs.
If that is the case, it will be the first time the cap was hiked outside of the six month current consultation period since it launched in January 2019.
However, Miltienyte said it would be unlikely.
10. What should I do if I’m on a pre-payment meter?
Under the price cap, customers on pre-payment meters will see the level rise by £153 to £1,309 on 1 October.
As with those on default tariffs, it may be best for them to stay put for now as they could be on a better deal than starting a new, much pricier, fixed offering.
Miltienyte said: ‘Pre-payment customers are already protected by the pre-payment price cap. There is no need to top up a lot right now, especially if that puts you into financial difficulty.
‘If you are on a pre-payment meter and your supplier goes bust, don’t worry, you will still be able to top up and your credit will be protected. The new supplier would be in touch to let you know of any changes in payment arrangements.’
Customers with pre-payment meters can still switch supplier with debts of up to £500 on gas and £500 on electricity.
Again, those concerned about debt should contact their supplier.