Energy prices are beginning to fall but it may be a while before the benefit hits households’ pockets
Household energy bills are set to fall this winter – but many people may not feel the benefit.
The government’s energy price guarantee (EPG) – introduced in October 2022 to protect households as the cost of gas and electricity soared following Russia’s invasion of Ukraine – effectively ended in July because Ofgem’s energy price cap fell below the EPG and “we pay the lower of the two”, as Money Saving Expert explained.
Ofgem, the energy regulator, introduced its price cap in 2019, to prevent “millions of households on expensive variable tariffs from being ripped off”.
The cap fell from 1 July to an average of £2,074 for a dual-fuel household paying by direct debit based on typical consumption. Ofgem has confirmed another drop from October that will reduce typical bills to £1,923, “the lowest level since October 2021”.
This drop reflects further falls in wholesale energy prices, said Ofgem, “as the market stabilises and suppliers return to a healthier financial position after four years of loss making”.
But many households still struggling amid the cost-of-living crisis will see “little difference”, said BBC News, as some government support schemes have now been stopped.
Why have energy bills been rising?
A range of factors determine your energy bills. “They’re not just the gas and electricity 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. It meant “many industries, places of work and leisure facilities” required more energy, explained This Is Money. Ultimately, this put “unprecedented pressures on suppliers”.
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, meaning buying and production costs are higher. These are then passed on to consumers.
What has been done to help?
Households have typically benefitted from fixed tariffs, which offer certainty and were kept low by competition in the energy market. These disappeared during recent spikes in costs, but “a few energy companies” are now offering these deals again, said Which?, including British Gas and EDF.
The alternative 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.
Most domestic energy customers were also benefiting from a £400 government-funded discount on their bills, which launched in October and ended in March 2023.
The government also spent £18 million 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?
Wholesale gas and electricity prices have fallen by around 85% and 80% respectively since reaching record highs at the start of 2023, said Reuters.
This was helped by a drop in the UK’s demand for gas, said the Financial Times “as strong wind speeds and high levels of imports from continental Europe have cut the amount of gas used for electricity generation”.
Traders are also becoming confident in the ability to refill gas storage sites across Europe, said the newspaper, despite lower Russian exports.
Due to these trends, energy analyst Cornwall Insight now expects the price cap to remain the same in the first quarter of 2024 and to then drop to £1,867 in the second quarter.
How much will this help?
While a drop in energy prices is positive, households are still facing higher costs.
Millions could end up paying more, said Sky News, because government support – “worth £66 a month – has now been withdrawn”.
Ofgem chief executive Jonathan Brearley told the broadcaster that it would be “helpful” to reintroduce these subsidies.
Cornwall Insight’s predictions for 2024 “show prices continuing to languish well above pre-pandemic prices – something which is currently forecast to remain the case for the remainder of the decade”.
As an alternative to the cap, said The Guardian, charities and suppliers are calling for the government to create a social energy tariff that would offer a “subsidised, below-cost price rate” to low-income and vulnerable households.
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.
