Hope for households as energy prices slump

Consumers are in line for considerably lower energy bills this year than feared, as gas and electricity wholesale prices tumble from the dizzying heights of the last few months.

Average energy bills are now expected to fall to £3,317 in April, then £2,478 in July, before rising slightly in October to £2,546, according to fresh analysis by Investec, a wealth management firm. The July estimate is £150 lower than the forecast on 4 January.

No one needs reminding that energy prices are still sky-high by historical standards. In October 2021, the energy price cap – which set a ceiling on what an average household paid – was £1,277. But back in the summer, analysts were predicting that average bills could cost as much as £5,386 by January, before swelling to an absurd £6,616 in April.

The new lower projection is being driven by a slump in the wholesale price of gas and electricity, thanks in large part to a mild winter, which has allowed the EU to refill its gas reserves at a time of year when the bloc is usually depleting them. European wholesale gas prices are down 80 per cent from their August peak.

UK wholesale gas prices have also fallen dramatically, dipping as low as £1.62/therm last week, a level last seen before the war in Ukraine. That’s a fall of 75 per cent from a peak of £6.40 at the height of the energy crisis in August, and a more than 50 per cent drop since the start of December. 

The government also stands to benefit from the warmer weather – bigly. A lifetime ago, in September, Liz Truss introduced the energy price guarantee, limiting the amount energy suppliers can charge per unit. It means a typical household now pays an average energy bill of £2,500 a year, although this is increasing to £3,000 a year from April. 

But if the latest forecasts are right, average bills are set to drop below £3,000 in the spring, slashing the government’s bill for state support. As Kay Neufeld and Mike McWilliams of CEBR wrote on Reaction this week, the exchequer could be in line for a £13bn “windfall” if gas prices in the coming year reflect the recent trajectory (admittedly quite a large “if” in such a volatile market).

Businesses, however, aren’t cheering as much as consumers. The existing Energy Bill Discount Scheme, which began in October, caps the unit cost of gas and electricity for all businesses. But the Treasury confirmed this week that this support will drastically reduce from 1 April and businesses with energy costs below £107/MWh for gas and £302/MWh for electricity will not receive any support. 

While the new scheme will run until March 2024 to avoid a “cliff-edge”, representatives of small businesses – which stand to lose out most – called the move a “huge disappointment”.

Even for households, the cost of energy bills over the coming months is still in the lap of the gods. If a prolonged cold snap has us reaching for the thermostat, all bets are off.  

Write to us with your comments to be considered for publication at letters@reaction.life