Energy bills: Will Hunt keep voters warm?

Britain’s energy suppliers are expecting a government U-turn on plans to cut energy support, meaning households are likely to avoid a brutal 20% bill hike in April.

To date, UK households have been partially shielded from the rise in wholesale gas prices by the government’s Energy Price Guarantee, which limits what a typical household pays on energy bills each year to £2,500. Come April, that ceiling was due to rise to £3,000 a year. 

But now, according to Whitehall sources, Chancellor Jeremy Hunt is preparing to extend the scheme until July. By that point, wholesale gas prices are expected to have fallen to such an extent that a government subsidy is no longer needed (analysts expect Ofgem’s energy price cap to drop to around £2,100 per year in three months’ time). 

While Number 10 is yet to confirm the extension of the government’s Energy Price Guarantee, it’s likely to be announced in Hunt’s Spring statement on 15 March. And city economists have already begun to factor it into their forecasts. It’s one of the reasons JP Morgan no longer predicts a recession. 

Back in February, Hunt insisted that extending the energy support was too expensive for the Treasury. Why the change of heart? 

In part, because he’s faced pressure from fuel poverty campaigners warning that the number of Brits unable to afford their energy bills would have doubled from one in ten to one in five if the guarantee cap had risen.

But, even more crucially, Hunt is likely to change tack because he can afford to.

Freezing bills is much less expensive for the government now than it was earlier in the winter as wholesale gas prices have dropped sharply since their peaks last year.

Last September, when the Energy Price Guarantee was announced, the wholesale gas price was about three times the level it is today. Having fallen steadily since December 2022, wholesale gas and electricity prices for 2023-24 are now at their lowest level in 18 months. 

This slump is down to reduced demand across Europe, driven by a combination of good luck and effective policy. 

Record winter temperatures across Europe have reduced the need for heating. This, alongside awareness campaigns urging people to cut energy usage, has caused European gas consumption to fall by 20 per cent.

The scramble to replace Russian gas has also proven more fruitful than many anticipated. Energy market traders have been encouraged by the efforts of European nations to fill gas storage facilities – notably with liquefied natural gas sourced from around the world. Weak demand in China has also helped divert LNG supplies to European countries. 

Analysts now predict that Europe will approach the end of the winter heating season with a record volume of gas still in storage. Gas storage sites across the continent are expected to be almost 55% full on 31 March 31, compared with just 26% on the same date in 2022 and far above the 39% seasonal average for the last decade. 

The fall in wholesale gas prices – in addition to better-than-expected tax receipts – means that Hunt is expected to have an extra £10 billion to work with when he delivers his Spring Budget in less than two weeks. 

In many respects, it would be foolish not to extend the energy price guarantee. 

The estimated £2.5 billion it would cost the government would be a good use of money for a party plummeting in the polls. Having garnered public support by offering such an extensive energy support package in the first place, why risk alienating households now? At this point, as the IFS points out, to extend it for a mere three more months would be “relatively cheap and politically popular.” As policy ideas go, it’s a no-brainer.

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