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Without massive Government intervention, millions of households will be forced to pay colossal sums in order to stay warm this winter. Last week, Ofgem announced its energy price cap would increase by 80% from October 1.
The energy regulator’s decision means households with average energy usage are now facing typical bills of £3,549 per year. Worryingly, the price cap is expected to go even higher in three months time. Some analysts have even suggested average bills will exceed £6,000 by April next year.
Whatever the exact figure of the new cap, it’s a fact that energy companies will soon be able to charge their customers much, much more. So, are utility companies really raking it in? And, if so, is now a good time for investors to grab a slice of the pie?
In this article we’re going to explore these questions, and more. Keep on reading for all the details or click on a link to head straight to a section…
There are a number of reasons why energy prices have risen so much over the past year.
1. A long winter in Europe & Asia. Last year, gas stocks were depleted across Europe and Asia due to a colder than usual winter. This placed a higher demand for energy at the time, and has had a knock-on impact on wholesale costs today.
2. Re-opening of the economy following lockdowns. A number of businesses were forced to close for a large chunk of 2020 thanks to the pandemic. This sent the cost of energy plummeting at the time. Yet, with many businesses ramping up their levels of productivity in the new, post-covid world, we’ve seen a complete reversal of this trend, as the demand for energy has grown.
3. Printing money. Many would argue the rising inflation we see today – including energy prices – has been partly caused by the Bank of England massively increasing the money supply in the form of quantitative easing.
4. The ‘green levy’. Around 15% of our energy bills is a ‘green levy’ that is supposed to help the energy companies come away from fossil fuels and use ‘cleaner’ forms of energy production. Whether this is actually happening is another issue.
However, the war in Ukraine has also had a massive impact on prices too. That’s because the US, plus many European countries, including the UK, have decided to reduce their reliance on Russian energy. This too, is another factor that has helped to send the cost of the oil and gas soaring.
It’s not just the cost of gas that has rocketed this year. Electricity prices have risen too. This is partly down to the fact that gas is used for a high percentage of the UK’s electricity generation.
Before we take a look at the performance of utility energy stocks over the past year, it’s worth understanding how the energy price cap works. That’s because the cap has a massive impact on the price suppliers are legally allowed to charge customers.
The energy price cap is reviewed four times a year by Ofgem. The cap is the maximum amount that energy suppliers can charge customers on a standard tariff for their energy. Importantly, the cap refers to the cost per unit of energy. There’s no maximum figure that any household can pay.
Because of the way the price cap works, UK utility companies have, for many months, been unable to charge customers anything near the true wholesale cost of energy. The cap is one of the reasons why 28 energy companies went bust last year!
So, while you may think that rising energy prices are a boon for energy suppliers in the UK, this isn’t really the case. Because of the cap, suppliers are limited as to how much they can charge UK households
Let’s take a look at the share price performance of some major energy companies so far in 2022. While not all are British, all of the below have retail operations in the UK.
With the exception of French-owned EDF Energy, no major supplier in the list above has seen their share price rocket this year. As a result, it’s can be easily argued that the majority of utility companies haven’t benefited from the surging cost of wholesale energy.
While energy utility suppliers haven’t enjoyed bumper profits this year, it’s a different story for major oil and gas producers.
Both BP and Royal Dutch Shell have seen their share prices skyrocket in 2022. BP’s share price is up 25.19% since the year began. Meanwhile, Shell PLC is up 33.8% over the same period.
Clearly these fossil fuel giants have benefited massively from the soaring cost of energy. That’s despite both companies having to pay additional 25% tax in the UK in the form of an Energy Profits Levy.
Now we’ve highlighted the impact of soaring energy costs on the share prices of utility companies, you may feel its best to avoid investing directly in these firms..
Not only does has the soaring cost of wholesale energy hit the share prices of a number of suppliers this year, but Ofgem’s energy price cap also limits the amount these firms can charge customers for their product. In other words, it’s easy to see how the legally-enforced price cap can hamper profits.
The UK energy market certainly isn’t a free one.
On the other hand, given the extraordinary year for oil & gas stocks, you’ll be forgiven for wanting a share of any future spoils in this industry – especially if you feel the cost of energy will continue to skyrocket. However, without a crystal ball, it’s impossible to tell whether BP and Shell will continue to raise a toast by the end of the year. In fact, it’s possible the value of these multinationals has already peaked.
As with any investing, you should never use past performance as a reliable indicator of future performance.
Of course, if you’re interested in investing in energy, then you aren’t limited to fossil fuels, or utility stocks.
The renewable energy sector, which includes solar and wind, is growing in popularity and certainly attracts a lot of government and corporate money. With this in mind, if you feel that renewable energy will continue to grow in future, then investing in the renewable sector is another option to consider. There’s also the added boon that your investment might help the planet!
If you want to go down this route, then buying a renewable energy exchange-traded fund (ETF), such as the ‘iShares Global Clean Energy ETF’ or the ‘Goldman Sachs Bloomberg Clean Energy Equity ETF’, could give you some decent exposure to the sector.
To learn more about share buying in general, take a look at our article that explains how to buy shares.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.