Why many energy companies are struggling to cope with inflation

In recent months a number of global factors have combined to create a ‘perfect storm’ of inflation, leading to rising energy prices and increasing the cost of investment in future green energy alternatives. 

Since the last quarter of 2021 energy prices have shot up to the highest levels in a decade. As the economy rebounded in a post pandemic world, oil and natural gas prices peaked, bringing in record profits for many fossil fuel companies such as BP. 

In addition to global economic macro factors brought on by the pandemic, Russia’s invasion of Ukraine and the recent sanctions have pushed fuel prices to unsustainable levels. 

The Move to Renewable Energy

This has spurred on many world leaders like US president Joe Biden to double down on green investments in order to lessen western countries reliance on fossil fuel giants like Russia and the Middle East while meeting climate change commitments and leading the world into a carbon neutral future. However, this too comes with its costs.

The shift to green energy means that demand for minerals has surged in order to help build more electric cars, solar panels and help cater to the battery storage boom and the fast growth in wind energy. Minerals such as Lithium, Nickel and Aluminium have seen their price rise as much as 1000% in the past year and the IMF have predicted their price will continue to increase dramatically for the next decade as companies and governments look to create sustainable energy alternatives. 

As the big energy companies transition from fossil fuels to renewable and low-carbon energy, investment in new oil and gas projects has slowed subsequently, and this has contributed to a shortage while companies make the change. This means that in the short term green energy projects are increasing inflation and pushing up the price of traditional fossil fuels. 

The Effect of the Price Cap Increase

The UK’s energy regulator Ofgem protects energy consumers, and ensures price fairness. Their energy price cap affects people on default energy tariffs and those who are on a price capped tariff. It tracks wholesale energy and other costs and acts as a ceiling on the per unit energy price.

This year the price cap will increase on average, to £1,971. This price cap increase has left many smaller energy companies unable to deal with inflation. The rising wholesale cost of fuel and the decreasing purchasing power of fiat currency mean that the energy companies themselves are having to increase their prices. In fact many energy companies have found it hard to keep their businesses afloat.  

The Post-Lockdown Surge

Another reason Inflation has risen across the board is the increased consumer demand as Britain transitioned out of pandemic restrictions in addition to global supply chain problems, staff shortages and the end of Covid support schemes and Brexit.

The rapid demand for oil and gas in this period has contributed to the surge in prices, with many “smaller” energy suppliers unable to keep up with ever-increasing costs. One way consumers have found to keep their energy bills low during this time is through combinator services that bundle gas, electricity, broadband, mobile and insurance bills into one. 

Thankfully the surge in prices has not affected established energy suppliers as much. Utility Warehouse, for instance, is still able to offer competitive prices because of long-standing deals. 

In times of great change things can get a little unsettling but as the post pandemic economy bounces back, there is cause for cautious optimism along with the hope of a more diversified and green energy future ahead.