Why are household gas and electricity bills not falling?

It's been a tough two years for energy customers. 

All suppliers announced major price increases last year on the back of multiple price increases in 2021. 

This has left gas and electricity prices in Ireland at record highs and left many households struggling to cope with their bills.

But over the past few months energy prices on wholesale markets have dropped, leading many to wonder why they aren't seeing any falls in their bills? 

In this article we look at what's been happening in the energy world and whether households can look forward to cheaper gas and electricity any time soon.   

Falling oil prices 

Much has been made about the fall in the price of oil in recent months. 

Oil is trading at around $70 to $80 a barrel, down significantly from its highs last summer when it reached over $120 a barrel following the outbreak of war in Ukraine. 

However we use oil to generate only around 3% of our electricity these days. So its price has very little impact on the overall cost of our electricity. 

On top of this, oil is sold in dollars and the euro has been quite weak against the dollar in recent months. 

At the start of 2022, €1 was worth around $1.15. However this fell as low as $0.96 last summer. Though the euro has since recovered a bit this year.

This has meant that a lot of the benefit of the fall in the price of oil has been negated by the weaker euro. 

Fall in the wholesale price of electricity   

Last October the Central Statistics Office (CSO) announced that wholesale electricity prices had fallen by 52% compared to the previous month. Which made big news and left many wondering why they weren't seeing cheaper energy bills.

More recently, for June, the CSO said wholesale electricity prices had dropped over 35% compared to the year before.  

However, wholesale energy prices are still at a very high level. At one stage during last summer, the price of gas was up by well over 1,000% on a yearly basis on wholesale markets. And in March 2022 the wholesale price of electricity in Ireland was up by over 400% compared to the year before. So when we hear of falling prices we need to remember that it’s on the back of prices which were at record highs to begin with.

The average price of electricity for the first six months of the year is still around €136 per MWh for example. That's still over THREE times what would be considered normal levels. 

Meanwhile, on the UK gas market, from where we import about 75% of our gas, the price of gas has been trading at very high levels until very recently. It has now fallen hugely. But due to hedging, which we discuss below, this benefit won't be felt by consumers immediately. 

*SEM Day Ahead market price

Hedging 

Another important point to remember is that energy suppliers buy their energy for delivery at different times throughout the year, and sometimes up to 12 or 24 months in advance through hedging.  

So the price households pay for their gas and electricity is usually an average price of the cost of energy on wholesale markets over the course of up to two years. This is to try ensure households aren’t faced with extreme swings in the price of their gas and electricity on a weekly or monthly basis. 

As mentioned, gas prices were up by over 1,000% last summer while electricity prices were up by over 400% at one stage last spring. But thanks to hedging an increase of this size wasn’t passed on to households. 

Buying in advance also means suppliers can be sure they have enough energy to meet their customers' demands. 

However a downside of hedging is that falls in the price of energy aren’t immediately passed on either. This is important to remember now in relation to gas. The price of gas has fallen hugely over the past few months and is now a lot closer to pre-war levels of around 50 pence a therm. However most suppliers will only have bought a tiny fraction of their supply at this recent price.   

Due to hedging, there needs to be a sustained reduction in the price of energy on wholesale markets for several months before the benefit is felt by consumers.

What does the future hold? 

The drop in gas and electricity prices on wholesale markets in recent months has largely been due to good weather. While strong wind output has helped ease electricity prices too.

Europe experienced an extremely mild winter which helped keep demand for gas far lower than expected, which has contributed to a drop in its price. And as we use gas to generate around 40% of our electricity, this has helped push electricity prices down too.  

There has also been a strong supply of liquified natural gas (LNG) into Europe which has helped replace Russian piped gas and eased concerns over shortages.  

The level of power outages at generation plants is also down compared to recent years. In 2020 and 2021 two of the country’s biggest electricity power plants at Whitegate in Cork and Huntstown in Dublin were out of action for a prolonged period which put big pressure on the electricity grid and prices. Keeping power outages at electricity plants under control will also be critical for Ireland's electricity prices over the coming months. 

Any further escalation in the Russian and Ukrainian conflict could also see prices shoot back up.

Nothing to pass on 

In short, household energy bills haven't reduced in recent weeks because there's been no real reduction to pass on. Yet.

Gas has been trading way above its normal price until very recently. While electricity is still trading at around three times its price compared to two years ago.

But if the trend continues we should see moderate falls before the end of the year. 

Switch, reduce and save 

With no immediate prospect of significantly cheaper energy bills, the only way to reduce your gas and electricity costs is to switch supplier to get a discounted introductory rate or to reduce your energy usage. 

You can switch energy supplier on bonkers.ie today. It's quick and easy and only takes a few minutes. Meanwhile here are 16 ways to use less electricity.