Why are energy prices so high in Europe?

Wholesale energy prices are soaring across Europe, especially in the UK, Spain and Portugal, because of shortages of the supply of natural gas from Norway and Russia.

When the price of natural gas increases, utilities normally turn to coal, but the price of coal has also increased because of record-high demand from Asia and an increase in the cost of carbon permits under the EU’s Emissions Trading Scheme. Unusually low wind volumes in recent months have also curtailed the supply of renewables.

Higher wholesale energy prices mean higher electricity and gas bills for households. Energy prices account for about 10% of the inflation basket, so will be a major driver of inflation in coming months.

These developments have also rung alarm bells about potential disruption from the transition to renewables. If coal is phased out before significant renewable energy production and storage capacity have been developed, spikes in energy prices could become more frequent.