Monday, 12 September 2011

Energy prices

I was honestly surprised with problems caused by the heavy snowfalls in the UK during the last and the previous winter. Only a few centimetres of snow and there was a natural disaster :) I am not saying that it is something very common in Poland (I miss Polish weather a lot!), but people there are more… used to changes in weather conditions.

Unfortunately for the British, within last year, prices of electricity have risen by a quarter and are predicted to increase by 10% this year and by 50% over the next four years. A similar situation happened with gas. Threats of gas shortages caused by the unrest in the Middle East and the earthquake and tsunami in Japan also impacted gas prices in the UK.

Most providers explain that they had to rise energy prices due to higher wholesale prices. However, wholesale prices are still lower than they were during the financial crisis, so it is no longer a reliable explanation.

During cold winters the demand for gas and electricity went up. People wanted to stay in warmth so they turned the heating on. The general rule of supply and demand relationship is that if the demand goes up it causes the price to increase. When more people need more energy, prices rise.

Higher energy prices caused many people to have problems with paying their bills, and consequently, made them to turn the heating off. The government’s strategy on fuel poverty is to be implemented by 2016. It would give them the certainty that the maximum cost of energy would not be higher than 10% of their take-home income. Now, the best thing to do is to switch to a fixed-price tariff, which is a protection from further price rises.

Rising energy prices cause cost-push inflation. If the prices of electricity and transport go up they cause prices of many other goods (for example food) to rise.

Last year the Office of Gas and Electricity Markets (Ofgem), which promotes competition and regulates monopoly of gas and electricity companies, wanted to check if energy firms understated their retail profits to justify higher prices. The regulator began investigating the 6 biggest energy companies and said it had evidence that they had pushed up prices in response to rising costs more quickly than they reduced them when costs fell. 

That’s what I think.


1 comment:

  1. 1. Which factors have contributed to rising energy prices? Illustrate these changes on a demand and supply diagram.
    2. To what extent do these higher prices contribute to rising inflation?
    3. What impact might these price rises have on (a) poverty and (b) real income distribution in the UK?
    4. Why are energy prices currently being investigated by Ofgem? What powers does the regulator have and what actions could be taken?