When will energy bills fall and how do gas prices affect them?

We are now all too familiar with how gas prices have increased over the past year and a half.

Since coming out of the pandemic demand for gas has gone through the roof, but supply has struggled to catch up. It has sent prices soaring and pushed up the cost of gas and electricity for both households and businesses.

This has been compounded by Russia’s invasion of Ukraine which has led to a squeeze on gas supplies across Europe and seen analysts predict a cold winter could lead to blackouts and energy rationing.

Bigger bills: Supply challenges have increased the cost of gas and electricity

Bigger bills: Supply challenges have increased the cost of gas and electricity 

But in recent weeks, the spot price of gas has fallen from record levels and is now similar to where it was 18 months ago. 

We look at whether a fall in gas prices will start to be reflected in our monthly bills, or whether we are facing months of elevated prices, even once the Government’s energy price guarantee comes to an end in April 2023.

What is happening to gas prices? 

Oil and gas spot prices measure the cost of buying for near immediate delivery – usually a day ahead – and are incredibly sensitive to minor market movements. So when European countries started to fill their gas storage facilities with liquified natural gas (LNG) over the summer, which are now reported to be nearly full, this may have pushed prices higher.

Prices have started to fall back in recent weeks as a milder-than-expected autumn has reduced demand, and a flurry of cargoes arriving at ports across Europe has eased supply concerns.

This is likely to be a temporary respite ahead of colder winter weather and associated increase in gas demand for heating 

Nathan Piper, head of oil and gas research at Investec said: ‘Day ahead prices are currently around 45p/therm, a significant drop from the 550p/therm high in the middle of the summer. This follows Europe refilling gas storage and unseasonably mild, windy weather.

‘However this is likely to be a temporary respite ahead of colder winter weather and associated increase in gas demand for heating. 

‘Although the spot price has declined to the ten year average, the forward curve continues to indicate high prices throughout the next two years leading to significant parts of European industry shutting down.’

How does the current £2,500 price cap work? 

The average unit price for dual fuel customers on standard variable tariffs paying by direct debit has been limited to 34p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, from this month.

These are average unit prices and it can vary slightly by region.

Under the energy price guarantee, some households saw bills cut while others saw them rise:

• A household with a previous annual bill of £1,000 would pay about £868

• A household with a previous annual bill of £1,500 would pay about £1,503

• A household with a previous annual bill of £1,971 would pay about £2,100

• A household with a previous annual bill of £2,500 would pay about £2,771

• A household with a previous annual bill of £3,500 would pay about £4,039

This was initially supposed to last until October 2024, but will now only be in place until April 2023 after new Chancellor Jeremy Hunt changed Liz Truss’s previous plans. 

After that, households could once again be subject to the Ofgem price cap. 

What could have been: ING has looked at the potential cost of bills, based on forecast energy prices in August and now 

How will this affect monthly energy bills?

If conditions continue as they are, many will be hoping that we will soon see a fall in our monthly energy bills. 

But that is not the case. Energy companies ‘hedge’ by buying gas and electricity well ahead of when it is needed. Suppliers will buy a certain amount of energy in advance to lock in the price and to reduce the risk of adverse price movements.

In fact, those suppliers that didn’t do this were caught out by the spike in energy prices and many went bust in the early months of the crisis.

It means that our monthly bills don’t reflect today’s prices, but rather the wholesale cost from when the supplier first paid for the energy. 

Currently our household energy bills are being kept artificially low by the energy price guarantee, and don’t represent the actual wholesale price being paid for by suppliers.

Had the £2,500 guarantee cap for the average household not been put in place, Ofgem would have increased its price cap to £3,549 per year in October 2022. 

This figure is based on an ‘average’ household, so if customers use more energy, they will pay more.  

Heating off? Unless mild conditions are sustained going into winter, meaning people use less gas, the temporary drop in prices will have a limited impact on prices paid by consumers

Should wholesale gas prices continue to fall, the Government is likely to be the beneficiary given they are the ones footing the bill.

The standard variable tariffs that households are on linked to the energy price cap will most likley remain at that price – even if wholesale gas and electricity prices dropped below this. A prolonged and seemingly permanent drop could eventually lead to new fixed rate deals being offered below the price cap, but firms are likely to be very cautious on doing this. 

Piper said: ‘For consumers the energy price cap is based on average gas prices over a six month period, so unless mild conditions are sustained this temporary drop in prices will have a limited impact on prices paid by consumers.’

Current gas prices might give an insight into how much consumers could be paying without the energy price cap, when the energy price guarantee is reviewed in April.

Gareth Kloet, energy spokesperson for GoCompare said: ‘If we didn’t have a price cap and if energy suppliers wanted to charge a margin on top of wholesale costs it would be more expensive than the current price cap. 

‘If it was left to the open market it would be close to £4,000… It’s been like that for a long time – the retail price is lower than the wholesale price.’

Energy consultancy Cornwall Insight predicts the price cap will rise to £4,348, almost £2,000 more than the current cap. 

Kloet said: ‘Wholesale gas costs are trending downwards but in order for that to come through with our bills there’s a whole host of things that need to happen. The main things are energy security and support for customers… we need that because the cost of electricity is still retailing above the current price cap.’

What will the Ofgem price cap be in April 2023? 

Predictions from analysts are as follows: 

Auxilione: £5,000

Cornwall Insight: £4,348

Pantheon Macroeconomics: £4,334 

ING: £4,250 

Investec: £3,900 

Average prediction:  £4,336

‘We won’t see it flowing through to bills anytime soon. In order for the cost of energy to come down in the longer term, we need a combination of government support, investment in infrastructure, increase storage capacity and to get better at buying internationally.’

Reducing demand will go some way in helping to bring the price down and there has been a concerted effort by some campaigners to educate Britons on the best way to conserve energy.

But to get bills down to a more sustainable level, the wholesale price of gas needs to come down across the board: not just spot prices, but prices in the season ahead contracts and futures market.

This can’t be done overnight and even with a mild winter the UK is likely to suffer in the long-term without investment in infrastructure.

Kloet added: ‘If we had storage capability for gas we could buy it when it’s cheap, store it and then use it when we need it. Instead we have to buy gas on the open market through forwar contracts which come at a premium.’

In the meantime, with war raging in Russia and no infrastructure projects in the pipeline, consumers will have to rely on government support.

If you remove the guarantee entirely the reality is the British public can’t afford it 

Kloet continued: ‘Someone needs to prop up the difference between what energy should cost and is costing, and what we’re charging consumers.

‘If you remove the guarantee entirely the reality is the British public can’t afford it. If it went up to £4,500, 30 to 40 per cent of the UK could be in fuel poverty. I would expect 5 to 10 per cent would simply be unable to pay that money and would fall into arrears.’

Energy UK added that while prices might be low at the moment, it is starting to see prices rise significantly to secure gas this winter when people need it most. 

Unless the price of gas stays cheap for a long period over winter, energy prices are likely to remain much higher than normal into 2023. 

What support is on offer? 

 As prices rise energy companies are increasing their support for customers, including additional funding for customers in fuel poverty. 

Suppliers in the UK provide discretionary support of around £54 million on top of the more than £1 billion in mandatory schemes they deliver every year, accordi ng to Energy UK. 

This includes the Energy Company Obligation and Warm Homes Discount. 

Suppliers have already implemented payment holidays, payment plans and credit advances to customers on pre-payment meters. 

Other measures include:  

  • Eligible British Gas customers are being offered grants of between £250 and £750 
  • EDF Energy is contacting 100,000 vulnerable customers to provide them with tailored help and access to apps like Energy Hub, which can help them reduce their bills by an extra £100 
  • Octopus created a £5million financial hardship fund at the beginning of the energy crisis dedicated to helping customers who are unable to afford the cost of living 
  • Utilita is introducing a hardship fund to help customers write off debt 

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