What could 2024 bring?

Gas and electricity prices are now a higher proportion of outgoings for a business than they have been for many years if not ever.  

As a business owner or director responsible for literally keeping the lights on you will already have an idea of the unprecedented shocks that have unfolded in the business energy market in the past 18 months. 

But what has caused them, can they happen again and what does the outlook for business energy prices in 2024 look like? 

Join us for a deep dive into the recent past and likely near future and how it will affect you and your business next year and beyond. 

What happened?

After some unpredictable and extreme price volatility in 2022, we have finally started to see things stabilise somewhat in 2023. 

Energy prices are still double what they were at the start of 2021 even as the rate of inflation over the same period has been about 11%.

Unlike households, no price cap was put into place for business energy, instead the government introduced discount schemes to offset the immediate pain. 

The first was the Energy Bill Relief Scheme which ran for six months from October 1st 2022 to March 31st 2023. This was then replaced by the Energy Bills Discount Scheme on April 1st. 

They sound very similar but when comparing the two schemes we can see that the funding has been cut dramatically and prices haven’t gone beyond the required minimum threshold since December 18th 2022 – months before the scheme even began.

Both business owners and householders have two things they need to consider: 

  1. The domestic energy price cap will increase by £94 from January 1st 2024 – up from £1,834 to £1,928 per year. But remember, it’s the unit rates that are capped, not the final bill. If you use more energy than the average household, you’ll ultimately pay more than the cap level.
  2. There is no price cap on business energy. Although business energy rates might be falling, prices aren’t capped and government support has been cut considerably since April. 

Business energy prices reflect the live market and move weekly. A reduction in wholesale prices has seen rates drop by 50% since October, but this is no guarantee of how prices will change in the future.

Ofgem said: “In the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis”.

Why are energy prices falling?

Energy prices rocketed as we entered the second half of 2022. But a relatively mild winter across the UK and much of Europe, coupled with the energy-saving efforts of homes and businesses worried by the prospect of unaffordable energy bills, helped to cut demand and caused a drop in prices across 2023. 

The energy market has also begun to recover following the aftermath of Russia’s invasion on Ukraine and subsequent events that saw prices rise. This has been helped by European countries cutting their reliance on Russian gas by filling storage facilities with liquified natural gas from across the globe.

As demand naturally decreased across spring and summer so did the price of energy, but they’re still around twice as much as they were at the start of 2021. Wholesale prices are still higher than pre-pandemic levels, and the energy experts have suggested that prices might not return to pre-pandemic levels this decade. 

So although wholesale energy prices have fallen, the actual cost of energy still remains very high. 

How much are wholesale energy prices right now?

Delivery contract rates are the wholesale prices in which suppliers typically pay for the energy they supply to domestic and business customers. 

The most recent direct contract rates from Ofgem and ICIS for gas and electricity are: 

  • Wholesale gas costs are around 135p per therm* (around 29 kWh) 
  • Wholesale electricity costs around £120 per MWh* (1,000 kWh)

To get a better understanding of just how much prices have dropped, we need to look at the “day-ahead” contract rates. These show how prices change in the spot market (where energy is bought and sold to meet demand) and influence the delivery contract rates. 

According to Ofgem and ICIS figures, the latest day-ahead contract rates are: 

  • Wholesale gas costs around 84p per therm* (around 29 kWh) 
  • Wholesale electricity costs around £90 per MWh (1,000 kWh)

What are the latest business energy rates? 

The rate your business is charged for energy is calculated based on the size and type of your business, as well as the amount of energy you use and when you use it. The location of your business will also impact how much you will have to pay. 

To help you gather a better understanding of how much business and energy rates currently are, compiled below is the average business gas and electricity rates based on business size. 

Current average business gas prices per kWh 

Business SizesAnnual Usage Unit price per kWh Daily standing charge Cost per year 
Micro Business 5,000 to 15,000 kWh 11.2p58.1p£1,332(based on annual usage of 10,000 kWh) 
Small Business 15,000 to 30,000 kWh 9.9p40.1p£2,374 (based on annual usage of 22,500 kWh) 
Medium Business 30,000 to 65,000 kWh9.5p67.1p£4,759 (based on annual usage of 47,500 kWh) 
Large business More than 65,000 kWh 9.1p67.8.8p£6,162 (based on annual usage of 65,000 kWh) 

Current average business electricity prices in kWh 

Business SizesAnnual Usage Unit price per kWh Daily standing charge Cost per year 
Micro Business 5,000 to 15,000 kWh 30p92.3p£3,337(based on annual usage of 10,000 kWh) 
Small Business 15,000 to 30,000 kWh 29.3p84p£6,899(based on annual usage of 20,000 kWh) 
Medium Business 30,000 to 65,000 kWh30.1p73.8p£14,567(based on annual usage of 40,000 kWh) 
Large business More than 65,000 kWh 27.8p68.4p£15,540(based on annual usage of 55,000 kWh) 

Note: Rates and bill size may vary according to your meter type and business location. The prices you’re quoted may be different from the average shown. The figures shown are the average unit rates and standing charges quoted by Bionic per business size from November 1st to November 14th, 2023. Rates do not include any Energy Bills Discount Scheme. 

What causes energy price volatility?

The biggest influence on energy price volatility is supply and demand. 

When energy is in short supply then prices tend to go up, but will usually drop again when supply levels are greater. The same principle applies with demand, prices go up when demand is high but usually falls when demand is less.

Price volatility has been a big issue over the last year or so because normal supply and demand issues have been coupled with the impact of global events that have pushed prices up further. 

Price volatility is always a concern for energy suppliers, which is why they typically trade on futures markets to help increase certainty about supply and prices for consumers. This means suppliers can buy or sell a set amount of gas or electricity at a specific price, for settlement on a specific date in the future. 

The reason energy suppliers are currently quoting such high rates (that’s if they’re able to quote any rates at all – some have had to temporarily pull out of the market) is that wholesale energy prices are currently at record high levels. 

But prices have been so volatile that suppliers have found it more difficult to trade in this market and may have to provide extra collateral to cover the risk of supply shortages. This has seen some suppliers pull out of providing prices when rates have spiked. And with no commercial cap in place, suppliers have increased out-of-contract gas rates by an average of 180%, and out-of-contract electricity rates by an average of 130% since August 2021.  

Here’s why these wholesale rates affect the price we all pay for gas and electricity: 

  • Suppliers buy energy from the wholesale market and then sell it to domestic and business energy customers 
  • When wholesale prices rise, energy suppliers increase their rates to cover the extra costs and we’re all hit with higher energy bills. 

Businesses that switch to a fixed-rate deal will protect themselves against any mid-contract price rises, however they will most likely see their rates rise at the next renewal time. 

Fluctuations in wholesale energy prices are occurring all the time. However, prices are currently so high and so volatile that it’s difficult to predict how much they will be from one day to the next, never mind in 12 months. 

Why are energy prices so high? 

The biggest factor in the energy price spikes across the globe have been supply and demand issues pushing up wholesale energy prices but there have been several others that have contributed to energy rate inflation including:  

  • Supply Shortages 

Gas shortages across Europe, caused by a prolonged cold winter between 2020 and 2021, drained existing natural gas storage which is being restored. 

  • High Demand 

Higher demand for liquified natural gas (LNG) from Asia has led to lower LNG shipments to Europe as a result. 

  • Closure of Nord Stream 1 

Nord Stream 1 is a large pipeline which transported gas from Russia to Germany. Its closure massively reduced the amount of gas that can be channelled to Europe and has caused natural gas prices to surge to their highest levels since March. After first limiting its capacity to just 20% Russia completely closed the pipeline causing additional supply shortages that impacted price. 

  • Infrastructure issues 

The postponement of building a Nord Stream 2 pipeline which was an $11 billion link across the Baltic Sea with the capacity to send 55 billion cubic metres of gas a year directly from Russia to Europe, bypassing Ukraine. Although the pipeline is complete, Germany stopped it from going live in response to the Russian invasion. 

This, combined with the fire damage at the large LNG plant in Texas caused a reduction in the amount of liquified natural gas being imported to Europe. The plant is aiming to be back up to 85% capacity by the end of the year. 

All these factors show that it’s not just the UK that’s being impacted by the energy prices. But there are also some unique problems are the UK that have to be acknowledged. 

Why have UK energy prices been so high? 

Like the rest of the world, the UK is trying to navigate through the global energy crisis while simultaneously juggling other issues that are affecting the supply, storage and prices we as a country pay for power. These include: 

  • Lower renewable energy generation 

Low winds, coupled with outages at some nuclear power stations, mean that a higher percentage of our electricity generation is using gas during its production. If you are on a green energy deal that provides 100% renewable electricity, you will still see an increase in your rates. This is because the way the UK energy system works means that the price of renewable energy is tied to the price of gas – if gas prices go up, so do renewable energy prices. 

  • Fire at a National Grid in Kent 

This knocked out a power cable that runs between England and France and used to import electricity from the continent. It wasn’t expected to be fully back up and running until 2023.

  • Low gas reserves 

The UK has some of the lowest gas reserves in Europe, which means there’s almost no way of stockpiling gas to use it when needed. Capacity is equivalent to roughly 2% of the UK’s annual demand, compared with 25% for other European countries and as much as 37% in Europe’s four largest storage holders. 

  • Insufficient government support 

Although the government’s £15 billion support package will see households credited with £400 over six months from October, this won’t have as big an impact as measures taken in other European countries. France, for instance, has capped electricity price increases to 4% until the end of the year.

  • Issues with the energy market 

28 UK energy suppliers have gone bust since 2021. This is largely down to many of them having a business model that couldn’t cope with an unprecedented increase in wholesale prices. When suppliers go out of business then consumers absorb the cost through higher bills. In the case of Bulb Energy, it had 1.5 million domestic and business customers when it ran into difficulties so was placed into Special Administration by the government instead of going through the usual “supplier of last resort” process. 

Initial estimates suggested this process would cost £2.2 billion over two years, but figures from the Office for Budget Responsibility (OBR) show that an extra £4.6bn has been spent on handling the company, which will bring the total to £6.5 billion. 

This could add as much as £200 on to annual household energy bills. 

Will energy prices go down in 2024? 

The answer to the biggest question for business owners and directors is hard to pin down, even based on the current available indicators and evidence. 

The ongoing underlying volatility of the market makes it even more difficult to predict what future energy prices will look like. Initial forecasts suggest that energy prices could remain high well into 2024. 

The Energy Bills Discount Scheme is due to end on March 31st 2024 with no replacement announced yet. Nor has there been any progress in lowering the VAT burden on businesses or other charges being paid that are not directly linked to the wholesale price of energy.

Other measures such as a commercial energy price cap and an emergency government energy grant for SMEs are being pushed by the UK Chambers of Commerce and the National Federation of Independent Retailers (NFRN). 

But there is no indication that any of these would be adopted but with a general election likely in 2024, the party’s manifestos would make interesting reading in this area. 

The ongoing saga of energy prices shows that even the most well run businesses are sometimes at the mercy of external forces beyond their control. 

This is why it is more important than ever for directors and business owners to make sure they have plans and contingencies in place for their companies no matter what 2024 has in store.

This is why we offer a free initial consultation to anybody who wants a better understanding of what options they have available for their business to help strengthen and protect their company – no matter what the next few months hold.