- UK energy costs may rise
- Gaza conflict impacts gas supply
- Wholesale prices not immediate concern
Energy costs in the United Kingdom may begin to rise once more as a result of rising wholesale petrol prices, just when consumers anticipated that costs would continue to decline.
Being on an agreement governed by the Ofgem price cap already costs the average household £1,843 annually on energy bills.
However, there are concerns that these costs may increase in the wake of the October 7th petrol and crude price spikes caused by the Hamas invasion of Israel.
Analysts at Cornwall Insight and the UK energy regulator Ofgem have both cautioned that as a consequence, gas bills for British households are likely to be volatile and substantially higher.
Presently, experts estimate that the average household’s annual energy bill will increase by slightly more than £50 beginning in January, and not just because of the Israel-Hamas conflict.
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But if the situation worsens and causes further damage to Middle Eastern gas supplies, the United Kingdom and other nations could experience much harsher increases in their energy bills.
The chief executive officer of the UK energy regulator Ofgem, Jonathan Brearley, stated last week, “Recent global events reinforce my belief that we must continue to plan with the expectation that wholesale markets will continue to be volatile and prices will remain high for some time.
While it is impossible for any individual to forecast the future, I believe that the current high and volatile pricing provide the best working assumption. Given the ongoing global events that have contributed to soaring petrol prices, it is probable that expenses will continue to increase during this winter.
Here is how we anticipate energy expenditures in the United Kingdom to evolve over the next few months.
Why could energy costs increase?
As a result of an increase in wholesale gas prices, which comprise the majority of gas bill costs for consumers.
These prices had been declining throughout 2023, but started to rise on October 7, 2023, when the Palestinian organisation Hamas invaded Israel and declared war.
The primary factor contributing to the increase in wholesale gas prices during this conflict is Israel’s subsequent cessation of operations at its Tamar gas field offshore.
Additionally, energy specialists are apprehensive that an escalation of the conflict could disrupt the gas supply from other regions of the Middle East.
This is a critical matter due to the fact that subsequent to its invasion of Ukraine in 2022, Russia severed gas supplies to Europe, resulting in intermittent flows.
However, the most recent conflict in the Middle East is not the only factor contributing to the escalation of wholesale prices, which may persist.
Additionally, Cornwall Insight noted that Australian gas workers are preparing to resume strikes at the Gorgon and Wheatstone gas facilities. Where their September wholesale price increases were precipitated by industrial action.
Energy experts are apprehensive that a gas pipeline rupture between Finland and Estonia, which may have been intentionally sabotaged, could cause a similar incident in another location.
Are prices for wholesale electricity increasing?
The conflict appears to have no effect on consumer electricity bills and thus wholesale electricity prices, which remain stable at present, and this is encouraging.
When are the invoices revised?
Not immediately. Although energy companies calculate energy invoices based on wholesale prices, these invoices do not reflect real-time costs.
Because wholesale energy prices fluctuate significantly. Energy companies hedge against this by purchasing gas and electricity well in advance of their requirements.
They have the ability to accomplish this months or even years before the actual need arises.
This indicates that our present monthly invoices do not reflect current prices, but rather the wholesale cost incurred by the supplier at the time of initial payment for the energy.
As a result, energy bill reductions due to low wholesale prices may not occur immediately. There are numerous methods for monitoring wholesale costs, such as the upcoming season and the current price, and all of these must decrease in order to affect energy expenses.
Changes in wholesale prices do not pose an imminent concern for the majority of consumers for an additional rationale.
The overwhelming majority of energy deals do not follow wholesale prices closely, with rare exceptions like the recent tracker tariff launched by Octopus Energy.
Conversely, the Ofgem price ceiling regulates energy expenses for over 90% of households in the United Kingdom, employing an annual resetting mechanism.
Prior to the end of December, when the subsequent reset occurs, price-capped energy invoices will remain unchanged.
The remaining non-price-capped households will enroll in fixed-rate energy contracts, and the terms of these contracts will remain unchanged until the conclusion of the fixed term.
Although adjustments to wholesale prices do have an impact on the cost of new fixed-rate tariffs, consumers can take solace in the fact that these tariffs are presently scarce in the market.
Craig Lowrey, principal consultant at Cornwall Insight, stated, “The movements in the underlying wholesale energy market are reflected in the daily fluctuations of our price cap forecasts.”
This underscores the susceptibility of energy prices in the United Kingdom, as well as customer bills, to geopolitical occurrences. It further emphasises the criticality for the government to reduce the nation’s dependence on imported energy while giving precedence to sustainable, domestically sourced energy in an effort to stabilise prices.
By what amount might energy costs increase?
Presently, the mean annual energy expenditure for a household utilising an average quantity of energy while enrolled in a variable-rate plan subject to the Ofgem price quota stands at £1,834.
Ofgem does not make predictions regarding the price limit, and it is exceptional for the chief executive officer, Brearley, to suggest that bills might increase this winter.
Cornwall Insight, on the other hand, has a track record of accurately forecasting fluctuations in the Ofgem pricing cap, and it currently believes that there will be a short-term increase in bills.
According to Cornwall Insight, the average annual bill will increase by £54.97 beginning on January 1, 2024, before decreasing to £1,819.60 in April, £1,781.37 in June, and £1,825.21 in October.
Nevertheless, Cornwall Insight computes each of these figures using novel Ofgem calculations implemented as of October 1 of this year to depict average energy expenses.
Cornwall Insight projects that the average energy bill will increase to £1,996.23 in January, decrease to £1,912.39 in April, decrease once more to £1,872.41 in June, and then rise to £1,922.20 in October of the following year, for an appropriate comparison with bills received prior to October 1.
