The largest contributing factor in UK supplied energy prices is the wholesale price. This is for both domestic and non-domestic (business) supplied energy. The wholesale price is itself dependent on the energy mix used for generating power.

Electricity generation in the UK comes from a variety of sources including gas, nuclear and renewables. UK-based coal-fired power was phased out at the end of September 2024.

Although renewables are dependent upon environmental and weather factors, they have no fuel costs, thus under the current energy generation mix, fuel costs and availability are the largest variable in energy generation costs. This then affects wholesale costs significantly, even though since 2020 both renewable sources and natural gas are responsible for comparable energy generation (35-40% each).

As the UK’s renewable energy generation capacity has increased from 3.8% of energy generation in 2005 to 43% in 2023/2024, reliance upon coal has decreased, while natural gas and nuclear have covered 50-60% of generation required.

Since some energy is imported, coal may still contribute to the generation mix for some time. It’s also clear that if the UK can increase renewables, the reliance upon gas reduces however the current economic model uses the most expensive marginal price (i.e. natural gas) to determine wholesale energy prices.

One of the faults with the system is that if 99% of energy is generated at £0.01 per unit, but the last 1% generated to meet demand cost £0.50 per unit, the wholesale cost is determined by the cost of the last unit of electricity needed to meet demand, which is also termed the “clearing price” as it is the price all generators are then paid.

Wholesale gas prices rose significantly following the COVID-era lockdowns as energy suppliers sought to recoup losses built up during lockdowns or simply low sales since many businesses just weren’t using the forecasted amount of energy. Then in Feb 2022 when Russia invaded Ukraine, there was a reduction in the supply of fuels, scarcity of supply and increased risk in transporting fuels so prices for supply and insurance rose. Part of this was due to sanctions imposed upon Russia by UK and the EU.

Scarcity causes prices to rise. Increased risk causes prices to rise. There were also potentially lower gas prices over the last decade or more as Russia and other natural gas supplying nations sought to push back on the expansion of renewables which would effectively reduce demand for their natural resources. The sudden rise in prices can also be seen, in part as a correction of historic pricing.

While the Energy Price Cap reduced the burden on consumers in the UK, there is no such measure for businesses. Faced with sudden energy price increases that in some cases were 200-300% higher, many UK businesses were struggling with potential rising costs.

To reduce the potentially catastrophic effect on UK businesses, the government brought in the following schemes. The Energy Bill Relief Scheme (EBRS) provided a discount on wholesale gas and electricity prices for non-domestic customers from October 2022 to March 2023. Then the Energy Bills Discount Scheme (EBDS) ran from April 2023 to March 2024, offering a per-unit discount on energy bills. Both schemes operated on a “claim back” model, meaning that suppliers paid out the discount to their customers before recouping those costs from the government.

Energy prices eventually reduced significantly but are still above 2021 levels. Both schemes have now ended, and businesses have been dealing with continuing high energy prices with no end in sight. In fact, wholesale gas prices are on the rise again after having dipped in early 2024.

Depending upon the size, industry and employment model of a business, energy costs can be one of the main costs to a business. Those in manufacturing, heavy industry, retail and hospitality have seen their costs soar. Their suppliers have also been affected causing a further knock-on of cost increases through higher input costs.

Since costs have increased, profits have reduced or been wiped out completely leading to higher prices for consumers and businesses reliant upon the producers. This is turn can reduce demand, which reduces the income potential for a business, which will reduce supply.

Businesses find themselves having to find cost-savings through efficiency savings, redundancies, reduction in business hours, site closures and other cost saving measures. There are some who will be able to trade through this difficult time. Others large and small will fold. It seems certain that the UK business economy will be significantly changed by the effects of the energy price increases in the UK.