Soaring energy costs – what can we do now and in the future

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With soaring energy prices fuelling the cost of living crisis, what can we do now and what does the future look like? We asked Tim Lord, Head of Climate Change at Phoenix Group, for his thoughts. 

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The price of gas has risen enormously in the last year. The vast majority of UK households use gas to heat their homes, and we also use gas to produce a significant proportion of our electricity.  That means that most of us are facing huge rises in both gas and electricity bills. 

So what can we do now and in the future? To answer these questions and more, we turned to Tim Lord, Head of Climate Change at Phoenix Group. 

Standard Life is part of Phoenix Group, the UK’s largest long-term savings and retirement business. This gives us access to experts across the group, like Tim Lord, Phoenix Group’s Head of Climate Change.

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• Why are our bills rising?
• Are energy prices likely to fall?
• So how can we reduce costs right now?
• What does the future look like?
• What are the challenges to this happening?
• How do all these factors affect how our pensions are invested?

Why are our bills rising?

Our energy bills are made up of a number of components – principally the wholesale costs of our energy suppliers buying gas and electricity, the costs of maintaining energy networks, support for energy efficiency and renewable generation, and VAT.

The key issue driving the increase in energy bills is the huge increase in the cost of gas, which we use to heat the vast majority of our homes, and produce around 40% of our electricity.

Gas is traded internationally, so what happens in other countries also affects the UK market – and the prices in international markets have been extremely high and volatile in recent months. This is due mainly to disruption in gas supply, in particular as a result of the war in Ukraine.

Some commentators have sought to blame the increase in prices on ‘green tariffs’. But new renewable energy is significantly cheaper than gas, and the proportion of bills going on green tariffs is now around 5%, down from around 11% a year ago. 

Are energy prices likely to fall?

Unfortunately, this doesn’t look likely in the short- to medium- term. The UK market has a price cap, which Ofgem has confirmed it will now review quarterly. This sets a maximum limit that energy providers can charge for each unit of gas and electricity. That cap is set to rise from £1277 last winter to over £4200 in January 2023 for the average household. 

In the longer-term, it’s hard to make accurate predictions – but it looks likely that gas will remain more expensive than it has been over the last decade, and that the price will remain highly volatile, for some time to come. 

That’s why we need to make sure we’re transitioning away from gas and onto forms of energy which are less vulnerable to the kinds of price spikes we’ve seen in recent months. Sources of energy generation such as wind, solar and nuclear can offer more price stability. But these will take time to build, meaning they don’t help with the short-term problem which millions of households are facing. 

So how can we reduce costs right now?

The most immediate option is to cut our energy consumption. Simple actions can help you to do this. For instance, turning down the thermostat where it’s safe and comfortable to do so – even reducing the temperature by one degree can reduce gas use by 10%. Many households could also significantly reduce energy use by reducing the flow temperature on your boiler. 

There are also potential savings from changing the way we use household appliances. For instance, doing fewer loads of washing (more at one time) on a cooler setting, reducing your shower time and adding a water saving shower head and using the kettle less often. There are many small changes you can make that all add up – this article details more. 

Delivering permanent energy savings means increasing energy efficiency, for example by installing insulation. This can result in savings of hundreds of pounds a year in many properties – and the high price of energy means savings are even bigger than they were.

And if you want to end your dependence on gas for heating, heat pumps are an increasingly economic option, with new government grants to support households switching away from gas. 

Investments in energy efficiency and low carbon heating of course require time and money, so won’t make sense now for everyone. 

Finally, it’s important to highlight that there is support available. If you’re worried about whether you can pay your bill, you can contact your energy supplier or Citizens’ Advice, who offer a range of guidance and advice. You can also find tips and resources on the financial help section of our website.
 

What does the future look like?

Our future energy mix needs to be secure, low cost, and zero carbon.  That means that the way we both produce and use energy is going to change significantly in the years ahead.

The first big change is that will be using more electricity, for example as we increasingly use electric vehicles to get around.  

We can expect our electricity mix in the long-term to be focused in particular on renewable energy generation from offshore wind, onshore wind, and solar. These already provide around 40% of our electricity, a number that’s rising all the time. 

Renewables are low cost and zero carbon, but rely on the wind and sun to produce power. So we’ll also need different sources of energy – such as large-scale nuclear power and other new technologies – to make sure we have the power we need, when we need it.

The second big change will be in our homes. We’ll be transitioning away from traditional gas boilers to heat pumps, and in some cases local heat networks or possibly hydrogen boilers, to heat our homes.  

Two other exciting developments are worth highlighting. First, the increasing opportunity for larger amounts of local energy production – whether in local communities or individual homes, through onshore wind turbines and solar power.  

And second, the potential for technology to help us shift our energy demand so we use the system more effectively and cut costs. Examples include charging electric vehicles overnight, when supply from wind can be high and demand is low.

What are the challenges to this happening?

The transition to a low carbon, secure, low cost energy system is possible – but it won’t be easy.  
The biggest challenge is the huge investment which is required.  To transform our energy system we need massive investment in new energy generation, new wires to get power where it needs to be, and in our homes and businesses as we cut energy waste and move away from gas boilers.  

That investment can drive jobs across the UK and help to lower bills in comparison to the sky-high prices we currently face.  But it needs to happen quickly, and at massive scale.  Making that happen requires big investments from government, in particular to help low-income households; and new policies and regulatory changes to help big investors (including pension funds) get involved as quickly as possible. 

How do all these factors affect how our pensions are invested?

The big change is that it creates opportunities for investing pensions in these new technologies. Doing this taps into growth opportunities for pension investors while also supporting clean energy and reducing emissions.

Whether it’s power companies investing in renewables, automotive manufacturers moving to electric vehicles, or big industrial companies producing or using zero-carbon hydrogen, the opportunities for pension investors are enormous. It’s a subject which my colleague James Wilde covered recently in this article. 

At Phoenix Group, we’re focused on halving the emissions of our assets where we have direct control by 50% by 2030, and getting our whole business to net zero by 2050 – because it makes sense both for the planet and for our customers.

Find out more

If you’re worried about your financial situation you can find tips and resources here.

As part of Phoenix Group, Standard Life is taking action to invest in the future we all want. We've set clear targets to help fight climate change, and to drive a wider more positive impact on our sector and economy. Read more about Standard Life’s commitment to sustainability and responsible investment and read the climate report from Phoenix Group. 

If you’d like to read more about responsible investing, take a look at these articles:

A beginner’s guide to responsible investing

If you want to grow your pension it’s crucial to consider climate change

Aim to grow your pension pot and do good – is it really possible?
 

The information here is based on the understanding of Phoenix Group in July 2022 and shouldn’t be regarded as financial advice. The value of investments can go down as well as up and may be worth less than what was paid in.

Standard Life accepts no responsibility for the information contained in the websites referred to in this article. This is provided for general information only.