Households could be set for lower gas and electricity bills this summer as falling wholesale prices have finally fed through to energy bills – but for how long?
When energy prices soared after Russia’s invasion of Ukraine, said BBC News, the government announced a limit of £2,500 on the typical amount that households could be charged for each unit of energy they use since October 2022, called the energy price guarantee (EPG).
Without this, pricing would have been set by energy regulator Ofgem’s price cap on bills, which was £3,500 between October and January, before rising to £4,279 at the start of this year.
While many of us will have taken measures to keep energy bills low during the winter, said MoneyWeek, regulator Ofgem has now given a “further helping hand” courtesy of the reduced energy price cap.
From 1 July, the energy price cap will be set at an annual level of £2,074 for a dual fuel household paying by direct debit based on typical consumption, “which reflects recent falls in wholesale energy prices”, said Ofgem.
That takes the price cap below the EPG, which is set to be scrapped at the end of June.
This may only be a temporary respite though, warned BBC News as prices are not expected to fall much further over the rest of the year, “and could edge up in winter”.
Why have energy bills been rising?
Energy prices are “determined by a range of factors beyond just the amount of energy you use”, said Ofgem. Suppliers also consider the price of buying gas and electricity on the wholesale markets, how much it costs to deliver it through the pipes and wires to your home, and their own operating costs.
The wholesale cost of energy began rising towards the end of 2021 after most pandemic lockdowns were lifted and “many industries, places of work and leisure facilities were then in need of more energy which put unprecedented pressures on suppliers”, explained This Is Money.
Russia’s invasion of Ukraine led to cuts in gas supplies to Europe, “which in turn sent European natural gas prices soaring”, the financial website added.
Gas is also predominantly used in the production of electricity, said uSwitch, so “the cost of buying the gas means it costs more to produce the electricity, and those costs are then passed on to customers”.
What has been done to help?
Fixed tariffs used to give households some certainty regarding their payments. These were kept low by competition in the energy market, but “they are currently few and far between”, said Which?.
The alternative to fixed tariffs is standard variable tariffs, which are the default prices customers usually pay when a deal ends. Standard variable tariffs were historically linked to a price cap set by Ofgem based on energy prices and supplier costs. The cap sets “a maximum price that energy suppliers can charge consumers for each kilowatt hour of energy used”, explained the energy regulator.
The Ofgem cap was set to hit £3,549 in October 2022. But then the government stepped in, launching its EPG during Liz Truss’s short stint as prime minister. This guarantee caps the rate suppliers can charge for each unit of energy to protect customers from steep bill hikes. With the policy in place, the average typical household bill is currently capped at around £2,500 per year until the end of June.
Most domestic energy customers were also benefiting from a £400 discount on their bills, which launched in October and ended in March 2023.
The government also spent £18m on an “It All Adds Up” energy-saving awareness campaign with TV and radio advertising campaigns that it claims “could help UK households cut hundreds of pounds off their bills”.
Will energy prices come down later in 2023?
An “unseasonably mild winter”, plus “fears of a global economic slowdown and weak oil demand in China” have resulted in falling gas prices, said the Financial Times.
The UK’s demand for gas has also dropped, “as strong wind speeds and high levels of imports from continental Europe have cut the amount of gas used for electricity generation”, the newspaper said, adding that traders are becoming confident in their ability to refill gas storage sites across Europe from the spring, despite lower Russian exports.
This means that “for the first time since the global gas crisis took hold more than 18 months ago”, prices are falling for customers on default tariffs, said Ofgem.
Due to this, energy analyst Cornwall Insight now estimates that energy bills for a typical household could drop to around £1,959.58 by the end of this year.
There has even been speculation that the lower wholesale energy costs will encourage suppliers to be more competitive, said MoneyWeek and some may launch fixed tariffs once again.
How much will this help?
While a drop in energy prices is positive, households are still facing higher costs.
MoneySavingExpert’s Martin Lewis told BBC News that winter bills could still be similar to last year as although prices are cheaper, households will not get the same £400 discount from the government they previously received.
The price cap is still “nearly double the pre-pandemic average,” warned Cornwall Insight. “We must confront the reality that the cap, while offering some limited protection, doesn’t do enough to shield many vulnerable consumers from the burden of unaffordable energy costs”.
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously worked for the FT’s Financial Adviser, the financial podcast In For a Penny and MoneyWeek. This article is based on information first published on The Week’s sister site, The Money Edit