However, this figure may be set to rise as electricity and gas bills are set to rise. Oil prices are also continuing an unrelenting climb with some in OPEC warning of a $200 a barrel.

See: post on fuel prices and oil company profits

I think that in the short term electricity supply is quite inelastic. When the price rises it is not easy for electricity generators to immediately increase the supply. They may have some spare capacity, but, mostly supply is fixed by the number and size of electricity power stations.

In the long term, the government and power companies could invest in new sources of electricity generation, but, this could take a long time to occur.  Therefore, over time supply will be more elastic. But, are the price increases temporary or permanent?

Because supply is inelastic, when there is an increase in demand we tend to get a significant increase in price. In recent years global demand for energy has risen because of economic growth in countries such as China and India. There large economies are growing at  a fast rate and this is a major factor in causing rising demand and therefore rising prices.

Cost Of Production

The price of electricity is also determined by the costs of production. For example, if the cost of buying coal for coal powered station rises, this will also increase the final price. In recent months there has been an increase in the cost of natural gas and therefore, electricity generated by rising gas prices has increased.

I believe renewable  sources of energy such as wind power and solar panels account for a very small % of the UK’s current energy needs. Nuclear power account for about 25% but there hasn’t been much investment in nuclear power in recent years.

•  Oil price increases
• Finding Alternatives to oil and fossil fuels
• Electricity generation at wikipedia