# Explainer-Why Europe faces climbing energy bills
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-15
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Europe Faces Soaring Energy Bills: Reasons and Outlook
Meta Description: Discover how the surge in wholesale power and gas prices is leading to higher energy bills for European households, with the most vulnerable facing fuel
URL: https://financedigest.com/explainer-why-europe-faces-climbing-energy-billshtml

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By Nina Chestney

A global surge in wholesale power and gas prices means households across Europe face much higher energy bills this year and beyond, with the region’s most vulnerable exposed to fuel poverty, consumer groups say.

WHY THE HIGH PRICES?

Energy companies pay a wholesale [price to buy the gas and electricity they sell](https://www.financedigest.com/3-tricks-to-get-a-better-price-when-selling-your-car.html "3 Tricks To Get a Better Price When Selling Your Car") to consumers. As in any market, this can go up or down, [driven by supply and demand](https://www.financedigest.com/turkeys-economy-grew-7-6-in-q2-driven-by-domestic-demand-exports.html "Turkey’s economy grew 7.6% in Q2 driven by domestic demand, exports").

Typically, [prices rise](https://www.financedigest.com/oil-prices-rise-on-u-s-drawdown-chinese-fears-weigh.html "Oil prices rise on U.S. drawdown, Chinese fears weigh") in response to higher demand for heating and lighting in winter, and fall in summer.

Prices started to rise above historically normal levels last September and have soared further following [supply disruption linked to Russia’s](https://www.financedigest.com/exclusive-kazakh-mcdonalds-shut-outlets-temporarily-after-halting-supplies-from-russia-sources.html "Exclusive-Kazakh McDonald’s shut outlets temporarily after halting supplies from Russia – sources") invasion of Ukraine that began on Feb. 24.

Just before the war started, the [German government halted the Nord Stream 2 pipeline that would have doubled the amount of Russian gas shipped to Europe](https://www.financedigest.com/ford-to-make-call-on-europe-job-cuts-by-mid-feb-as-buyers-circle-german-site.html "Ford to make call on Europe job cuts by mid-Feb as buyers circle German site") and Russia in July reduced volumes pumped through Nord Stream 1 to 20% of capacity, citing maintenance issues.

The [German government said this is a pretext used by Moscow to hit](https://www.financedigest.com/cash-loving-germans-fret-over-exploding-atms-as-cross-border-crime-wave-hits.html "Cash-loving Germans fret over exploding ATMs as cross-border crime wave hits") back against Western sanctions imposed over the Ukraine war.

French [nuclear outages and a heatwave across Europe](https://www.financedigest.com/edf-edison-ansaldo-team-up-to-develop-nuclear-power-in-europe.html "EDF, Edison, Ansaldo team up to develop nuclear power in Europe") this summer have also boosted demand.

Benchmark European gas prices at the Dutch TTF hub have risen by nearly 350% year on year, while [German and French front-year power contracts](https://www.financedigest.com/german-gdp-contracted-by-0-4-in-the-fourth-quarter.html "German GDP contracted by 0.4% in the fourth quarter") have leapt by 540% and 790% respectively.

HOW LONG COULD THIS LAST?

Many gas market analysts expect prices to remain elevated for the [next two years](https://www.financedigest.com/eu-could-face-gas-shortage-next-year-iea-warns.html "EU could face gas shortage next year, IEA warns") or more.

Global competition for gas and coal this winter is expected to prevent [prices from falling](https://www.financedigest.com/uk-house-prices-stabilise-after-four-month-fall-halifax-says.html "UK house prices stabilise after four-month fall, Halifax says"). Any more disruption to Russian gas supply, such as a full stoppage through [Nord Stream](https://www.financedigest.com/denmark-invites-nord-stream-operator-to-help-salvage-unidentified-object.html "Denmark invites Nord Stream operator to help salvage unidentified object") 1, would support prices.

Although European countries are on track to refill gas storage sites to a minimum level of 80% by Oct. 1, an extra [cold winter](https://www.financedigest.com/first-winter-cold-snap-tests-french-power-grid.html "First winter cold snap tests French power grid") could deplete those reserves quickly.

WHY RETAIL [PRICE RISES](https://www.financedigest.com/balancing-britains-energy-security-options-as-prices-rise.html "Balancing Britain’s energy security options as prices rise")?

Many energy suppliers pass on higher wholesale [costs to consumers through their retail](https://www.financedigest.com/amazon-other-retailers-revamp-free-shipping-as-costs-soar.html "Amazon, other retailers revamp ‘free’ shipping as costs soar") tariffs. In Britain, for example, on a dual [fuel bill](https://www.financedigest.com/uks-sunak-to-halve-support-that-helps-businesses-pay-fuel-bills-the-times.html "UK’s Sunak to halve support that helps businesses pay fuel bills -The Times") (electricity and gas), the wholesale cost can account for 40% of the total.

[Suppliers can buy energy](https://www.financedigest.com/french-energy-suppliers-will-let-struggling-bakers-renegotiate-contracts-le-maire.html "French energy suppliers will let struggling bakers renegotiate contracts – Le Maire") on the wholesale market on the day of delivery, a day ahead and up to months or seasons in advance, as they try to predict when prices will be lower and how much to purchase to cover their customer needs.

If suppliers do not [buy enough energy, they might have to buy more at a price](https://www.financedigest.com/4-for-the-price-of-1-what-you-can-buy-in-the-uks-top-northern-cities-for-the-price-of-a-london-pad.html "4 for the price of 1: What you can buy in the UK’s top northern cities for the price of a London pad") that could be higher, depending on market movements.

[GOVERNMENT ACTION](https://www.financedigest.com/uk-energy-ceos-urge-government-action-on-horrific-price-surge.html "UK energy CEOs urge government action on ‘horrific’ price surge")

The European [Union in July asked its member states to reduce gas demand voluntarily by 15% this winter with the possible introduction of mandatory cuts](https://www.financedigest.com/telecom-italia-in-talks-with-unions-on-up-to-2000-job-cuts-in-italy.html "Telecom Italia in talks with unions on up to 2,000 job cuts in Italy").

Several European governments had already taken measures to drive consumption down before the announcement, such as laws on air conditioning and heating levels in [public and commercial buildings](https://www.financedigest.com/public-power-corp-rwe-to-build-five-solar-farms-in-greece.html "Public Power Corp, RWE to build five solar farms in Greece").

Germany has [moved to the second stage](https://www.financedigest.com/analysis-at-world-cup-saudi-crown-prince-moves-back-on-to-global-stage.html "Analysis-At World Cup, Saudi crown prince moves back on to global stage") of a three-tier emergency gas plan. The third stage envisages supply being curtailed to industry.

It will also introduce a gas levy to distribute the high costs of replacing Russian gas among all end-consumers from October but this could [see German energy bills rise by another 480 euros](https://www.financedigest.com/euro-7-emissions-proposals-the-sequel-europes-carmakers-dont-want-to-see.html "Euro 7 emissions proposals, the sequel Europe’s carmakers don’t want to see") ($489.46) a year.

Governments have also announced measures such as subsidies, removing environmental levies or VAT from bills and [price caps](https://www.financedigest.com/eu-meets-to-try-to-break-gas-price-cap-impasse.html "EU meets to try to break gas price cap impasse").

Britain, which relies heavily on gas for heating, introduced a price cap on the most widely-used energy tariffs in 2019 that sets a maximum [charge per unit of energy and limits suppliers’](https://www.financedigest.com/tesco-to-charge-online-booker-suppliers-new-fulfilment-charge.html "Tesco to charge online, Booker suppliers new fulfilment charge") profits to 1.9%.

However, the cap is estimated to [rise to over 4,200 pounds](https://www.financedigest.com/dollar-slips-after-upbeat-china-data-euro-pound-rise.html "Dollar slips after upbeat China data; euro, pound rise") ($5,075.28) a year in January, up 230% on the year before.

WHAT CAN CONSUMERS DO?

Households account for 30%-40% of [Europe’s gas demand](https://www.financedigest.com/demand-for-energy-efficient-and-advanced-fairway-mowers-to-be-witnessed-across-europe.html "Demand for Energy-efficient and Advanced Fairway Mowers to Be Witnessed across Europe"). Some 80% of household gas [demand is from heating while the rest is from hot water](https://www.financedigest.com/demand-for-water-electrolysis-machine-market-to-surge-at-a-7-cagr-through-2030.html "Demand for Water Electrolysis Machine Market to Surge at a 7% CAGR Through 2030") and cooking.

Usually demand is higher in the winter gas season, which runs from October to March.

According to Bernstein analysts, certain [measures by households could reduce household gas demand](https://www.financedigest.com/ad-hoc-advancements-in-technology-to-accelerate-the-demand-for-medical-instruments-and-the-after-surgery-measures.html "Ad-hoc Advancements in Technology to accelerate the demand for Medical Instruments and the after-surgery Measures") by a third.

Turning a thermostat down by 1 degree to 19 degrees Celsius from 20C could reduce household gas [demand by around](https://www.financedigest.com/demand-for-fatty-amines-in-germany-is-projected-to-increase-at-a-cagr-of-around-4-from-2021-to-2031.html "Demand for fatty amines in Germany is projected to increase at a CAGR of around 4% from 2021 to 2031 ") 7%. Lowering the [temperature by another one degree could reduce household gas demand](https://www.financedigest.com/demand-for-temperature-controlled-pharma-packaging-solutions-to-reach-over-us-9-bn-by-2030-fmi-projects-a-decline-till-q2-2020-amid-covid-19-pandemic.html "Demand for Temperature Controlled Pharma Packaging Solutions to Reach over US$ 9 Bn by 2030; FMI Projects a Decline till Q2 2020 Amid COVID-19 Pandemic") by a further 7%.

Wearing a thick jumper at [home during the winter season could deliver another 4% saving](https://www.financedigest.com/working-from-home-heres-how-you-can-save-money-on-your-auto-insurance.html "Working From Home? Here’s How You Can Save Money on Your Auto Insurance") in household demand.

Delaying putting on the [heating to November from October and/or stopping heating by February rather than March could save](https://www.financedigest.com/lights-off-heat-down-central-europe-governments-save-power-to-set-example.html "Lights off, heat down: central Europe governments save power to set example") 3%-6%. Turning radiators off in unusued rooms, replacing shower heads with water efficient ones and only using boilers twice a [day could save](https://www.financedigest.com/britain-has-10-days-to-save-christmas-retail-sector-says.html "Britain has 10 days to save Christmas, retail sector says") a further 7% of demand.

In Britain, the “Don’t Pay UK” campaign is calling for a reduction in energy [bills](https://www.financedigest.com/energy-bill-support-pushes-uk-budget-deficit-to-february-record.html "Energy bill support pushes UK budget deficit to February record") to an affordable level and urges people to cancel their direct debit energy payments from October.

($1 = 0.9807 euros)

($1 = 0.8275 pounds)

(Reporting by Nina Chestney; Editing by Barbara Lewis)


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