Gas prices can feel like something that just happens to your business. They go up, your bills go up, and it's not always clear why. But there are real reasons behind the changes, and understanding them helps you make better decisions about your energy contracts.

This guide explains the main factors that drive UK gas prices and what they mean for small businesses.

Where the UK gets its gas

The UK produces some of its own gas from the North Sea, but domestic production has been falling for years. We now import a significant portion of what we use, mainly through pipelines from Norway and as liquefied natural gas (LNG) shipped from countries including the US and Qatar.

That reliance on imports means UK gas prices are directly linked to what's happening in global energy markets. When something disrupts supply or pushes up demand elsewhere in the world, we feel it here.

The main factors that influence gas prices

Global supply and demand

Gas is a global commodity. When demand rises sharply, such as during a cold winter across Europe or a surge in industrial activity in Asia, prices go up. When supply is disrupted, by maintenance on pipelines, industrial action or geopolitical events, the same thing happens. The price the UK pays reflects this constantly shifting balance.

Geopolitical events

The war in Ukraine that began in 2022 showed just how exposed European gas markets are to political instability. Russia had been a major supplier of gas to Europe, and when that supply was disrupted, prices spiked sharply across the continent, including in the UK. Events in major producing regions, from the Middle East to North Africa, can have a similar effect.

Storage levels

The UK has relatively limited gas storage capacity compared to some European neighbours. At the start of winter, if storage levels across Europe are low, prices tend to be higher because suppliers are competing for the same supply. A well-stocked summer can take some pressure off winter prices.

Weather

Cold winters drive up demand for heating, which pushes prices higher. A mild winter does the opposite. Weather also affects other energy sources. A period of low wind or less sunshine increases demand for gas-powered electricity generation, which has a knock-on effect on gas prices.

The wholesale market

Your supplier buys gas on the wholesale market, either in advance or closer to the time it's needed. The price they pay feeds directly into what they charge you. When wholesale prices are high, business energy contracts tend to cost more. When they fall, the benefits can take time to filter through to customers, particularly those on fixed contracts.

Why business energy prices don't always move in line with wholesale prices

If you've ever wondered why your bill didn't fall when you heard gas prices were dropping, there are a few reasons. Suppliers often buy gas in advance and at fixed prices, so changes in the wholesale market don't immediately affect what they're paying. Fixed-term contracts also mean you're locked into a rate regardless of what the market does while you're on it.

This cuts both ways. When prices are high, being on a fixed contract protects you. When prices fall, you won't benefit until your contract comes up for renewal.

What this means for your business

You can't control global gas markets, but you can make smarter decisions about how and when you buy energy. A few things are worth keeping in mind:

• Fixed-term contracts give you price certainty, which makes budgeting easier. They're usually the right choice for most small businesses.
• The timing of when you sign a contract matters. Locking in when wholesale prices are high means paying more for the duration. If your contract is up for renewal, it's worth keeping an eye on the market.
• Using a broker or energy consultant can help you navigate the timing and find a competitive deal, though check how they're paid before you engage one.