The energy price cap explained

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13 August 2021 - It was recently announced that Ofgem's price cap has risen, and energy prices along with it. Here we explain why this has happened, and how these changes affect UW customers and the tariffs they're on.

We understand that higher energy bills are never welcome but, like all other suppliers, we are affected by these higher costs and cannot avoid passing them on to our customers.

However, your new energy prices (which take effect from 1 October 2021) are up to 5% below the fair price set by Ofgem – and we promise to keep them lower than the price cap for as long as you remain a customer.

 

Read more from Ofgem about how the price cap increases could affect you >

Why are energy prices rising?

Wholesale energy prices – the prices suppliers pay to buy energy –  have risen by about 50% since February 2021. When this happens it’s usually unwelcome news for customers as it means an increase in their energy bills – either shortly for those on a Variable tariff, or when their current Fixed price tariff ends.

What is the Ofgem price cap?

The energy ‘price cap’ is the maximum price suppliers can charge customers on a standard or default tariff.

The price cap was introduced at the start of 2019 by the government. This resulted in “a fair price for energy” to make sure energy companies don’t charge their customers too much, but also that they’re able to cover their costs of buying energy.

The price cap is reviewed twice a year by Ofgem (the UK’s energy regulator) – in April and October. 

What are wholesale prices?

This is the price suppliers like UW pay to buy energy. 

The graphs* below show the movement of wholesale costs since February on gas and electricity prices and their impact on the price cap.

*Source: Ofgem: Energy bills are rising – and what you can do about it article

More information

*Source: Ofgem: Energy bills are rising – and what you can do about it article

 

Gas prices: 

At-a-Glance Summary

Forward gas prices have risen steeply over the last 5 months. GB and European gas storage levels are at historically low levels and will need to be filled over the rest of the summer and beyond to meet Winter '22 demand. This was compounded by protracted cold temperatures. Unlike in previous years flexible LNG has been going to Asian gas hubs because they have been trading above European ones. A reduction in European pipeline deliveries year on year has also pushed up prices.

Methodology

The contracts used to create this graph are an average of specific quarterly and seasonal forward contracts. For example:

  • For contracts traded between 01 February and 31 July ’21 we will use contracts for delivery Quarter 4 ‘21, Quarter 1 ’22, Quarter 2 ’22, Quarter 3 ’22, Winter ‘21 and Summer ‘22

  • For contracts traded between 01 August ’21 and 31 January ’22 we will use contracts for delivery Quarter 2 ‘22, Quarter 3 ’22, Quarter 4 ’22, Quarter 1 ’23, Summer ’22 and Winter ’22.

  • These are the reference contract delivery periods used in the price cap methodology. See for more details on the Price Cap Methodology.

 

All transactions for each contract type, for each week are averaged on a volume-weighted basis. These are then averaged to arrive at a single data point for each week.

Where a particular contract is not traded within a given week, it is excluded from the data point average.

Each data point represents a weeks’ worth of data. For example, the 26/04/2021 data point covers all transactions for the week of Monday 26/04/2021 to Friday 30/04/2021 inclusive.

The data used to produce these charts is obtained by Ofgem directly from brokers. In contrast the underlying data for the Price Cap wholesale cost assessment is provided by a third-party Price Reporting Agency.

 

Electricity Prices: 

At-a-Glance Summary

Electricity prices are heavily impacted by rising gas prices because of the importance of gas-fired power stations as the marginal unit to meet demand.  This is the most significant driver of the increase in wholesale electricity prices. Forward electricity prices are also influenced by the cost of carbon allowances, which generators buy in the UK ETS (previously under EU ETS before May 2021). These allowances have also increased significantly in 2021. Carbon prices add to the cost of electricity prices because it is a marginal cost for non-renewable generation which must buy carbon allowances to offset their carbon emissions.

Methodology

The contracts used to create this graph are an average of specific baseload and peakload seasonal forward contracts. For example:

  • For contracts traded between 01 February and 31 July ’21 we will use contracts for delivery winter season ‘21/22 and summer ’22.

  • For contracts traded between 01 August and 31 January ’22 we will use contracts for delivery summer season ‘22 and winter season ‘22/23.

  • These are the reference contracts used in the price cap methodology. Link to the Price Cap Decision Overview.

 

All transactions for each contract type, for each week are averaged on a volume-weighted basis. These are then averaged to arrive at a single data point for each week.

Where a particular contract is not traded within a given week, it is excluded from the data point average.

Each data point represents a weeks’ worth of data. For example, the 26/04/2021 data point covers all transactions for the week of Monday 26/04/2021 to Friday 30/04/2021 inclusive.

I’m a UW customer – am I affected?

If you’re on one of our Variable tariffs or have a prepayment meter, then the answer is yes. 

If you’re on a Fixed tariff you won’t be affected. 

What do I need to do?

Nothing. If you haven’t already, you’ll hear from us shortly with information on how this directly impacts you. Our core aim is to make life simpler for our customers. If you’re on a budget plan, we’ve reviewed your account to make sure that you’re paying the right amount for your energy moving forward.

When will prices go up from?

The prices will take effect from 1 October 2021.

When will I see changes on my bill?

The new prices will be shown on your November bill which will cover your energy charges for October 2021. 

Are all suppliers raising their prices?

Yes – all energy suppliers will be increasing their costs for customers who are impacted. 

Some useful links:

More information about wholesale prices and our Fixed and Variable tariffs here.

For handy tips and information on how using less energy can help you bring down your energy costs, please visit our ‘Help and support’ page.

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