EXPLAINER-Why Europe is facing rising energy bills

(Updates throughout) * Wholesale gas prices up 350% year over year

* High prices are expected to continue this year and next * Rising wholesale energy costs are being passed on to consumers

A global spike in wholesale electricity and gas prices means that households across Europe face much higher energy bills this year and beyond, with the most vulnerable in the region exposed to the fuel poverty, according to consumer groups.

WHY THE HIGH PRICES? Energy companies pay a wholesale price to buy the gas and electricity they sell to consumers. As in any market, this can go up or down, depending on supply and demand.

Typically, prices rise in response to increased demand for heating and lighting in winter and fall in summer. Prices began to rise above normal historical levels last September and have climbed further following the supply disruption linked to Russia’s invasion of Ukraine which began on February 24.

Just before the start of the war, the German government shut down the Nord Stream 2 gas pipeline which would have doubled the amount of Russian gas shipped to Europe and Russia in July, reducing the volumes pumped through Nord Stream 1 to 20% of the capacity, citing maintenance issues. The German government said it was a pretext used by Moscow to retaliate against Western sanctions imposed during the war in Ukraine.

French nuclear outages and a heat wave across Europe this summer also boosted demand. Benchmark European gas prices on TTF’s Dutch hub rose nearly 350% year-on-year, while German and French first-year electricity contracts jumped 540% and 790% respectively.

HOW LONG CAN THIS LAST? Many gas market analysts expect prices to remain high for the next two years or more.

Global competition for gas and coal this winter should keep prices from falling. Any further disruption to Russian gas supply, such as a complete shutdown of Nord Stream 1, would support prices. Although European countries are on track to fill gas storage sites to a minimum of 80% by October 1, a very cold winter could quickly deplete these reserves.

WHY ARE RETAIL PRICES RISING? Many energy providers pass on higher wholesale costs to consumers through their retail tariffs. In Great Britain, for example, on a bi-energy bill (electricity and gas), the wholesale price can represent 40% of the total.

Suppliers can buy energy on the wholesale market on the day of delivery, a day in advance and up to months or seasons in advance, as they try to predict when prices will be lower and how much to buy to cover their customers’ needs. If suppliers do not buy enough energy, they may have to buy more at a price that could be higher, depending on market movements.

GOVERNMENT ACTION The European Union asked its member states in July to voluntarily reduce gas demand by 15% this winter with the possible introduction of mandatory cuts.

Several European governments had already taken steps to curb consumption before the announcement, such as laws on air conditioning and heating levels in public and commercial buildings. Germany has moved into the second stage of a three-tier emergency gas plan. The third stage envisages the reduction of supply to industry.

It will also introduce a gas tax to spread the high costs of replacing Russian gas among all end consumers from October, but this could increase German energy bills by an additional 480 euros ($489.46) per year. year. Governments have also announced measures such as subsidies, the removal of environmental levies or VAT on invoices and price caps.

Britain, which relies heavily on gas for heating, introduced a price cap on most used energy tariffs in 2019, which sets a maximum charge per unit of energy and limits supplier profits to 1.9 %. However, the ceiling is expected to hit over 4,200 pounds on Tuesday ($5,075.28) a year in January, up 230% from a year earlier.

WHAT CAN CONSUMERS DO? Households represent 30 to 40% of gas demand in Europe. About 80% of household gas demand comes from heating, with the rest coming from hot water and cooking.

Usually, demand is highest during the winter gas season, which runs from October to March. According to Bernstein analysts, certain measures taken by households could reduce household gas demand by a third.

Lowering a thermostat by 1 degree to 19 degrees Celsius from 20°C could reduce household gas demand by around 7%. Lowering the temperature by an additional degree could reduce household gas demand by an additional 7%. Wearing a thick sweater at home during the winter season could save another 4% on household demand.

Delaying heating to November from October and/or turning off heating in February rather than March could save 3-6%. Turning off radiators in unused rooms, replacing shower heads with water-efficient ones, and only using boilers twice a day could save another 7% of demand. In Britain, the ‘Don’t Pay UK’ campaign is calling for energy bills to be brought down to affordable levels and urging people to cancel their direct debit energy payments from October. ($1 = 0.9807 euros) ($1 = 0.8275 pounds)

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)

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