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UK household energy bills would need to rise by more than £550 a year if the price of gas stays at its current level and without government intervention, industry experts have warned.
The UK price cap, which will limit the average annual bill for gas and electricity to £1,277 from next month, would need to rise to £1,834 if households were to cover the full costs of buying supplies today for the next 12 months.
The figure, calculated by industry consultants EnAppSys for the FT, laid bare the pressure the government is facing to protect consumers from an energy crunch that has exacerbated the “cost of living” crisis.
Business secretary Kwasi Kwarteng has ruled out calls from some companies in the industry to eliminate the price cap, which they believe has distorted market signals and will contribute to the expected collapse of as many as 40 smaller retail energy suppliers this winter.
Smaller suppliers, at a meeting with officials on Tuesday, called for changes to the way regulator Ofgem calculates the price cap, which it reviews every six months, said people familiar with the discussions.
But Kwarteng rejected the demands. “They wanted the cap tweaked or changed or adjusted or recalculated, and his answer was ‘no, no, no, no’” said one person familiar with the discussions.
Kwarteng has said he is putting protecting consumers front and centre of discussions with retail energy suppliers. The government has been scrambling to place customers from failed energy providers with larger businesses without weakening the entire sector.
At least five energy retailers have failed since the beginning of August with more expected to go out of business this week.
The cap is based on various elements, including government levies and taxes, but the wholesale price of gas and electricity contributes at least 40 per cent.
Consumers are already facing an increase of £139 to their energy bills in October as a result of Ofgem’s August announcement that the cap would be lifted as gas prices started to soar.
The figures from EnAppSys are based on how much it would cost to buy a year’s worth of electricity and gas for an average household in the wholesale energy futures market today.
Future prices reflect traders’ current expectations of where the market will be in the coming months and are used in a wide range of government calculations and forecasts. They will change in the coming months, but could go higher or lower.
EnAppSys’s methodology was based on Ofgem’s published details of the role wholesale prices play in determining the price cap.
“These show that if the next 12 months were hedged against baseload the real cost of supply would be £1,834 versus £1,277,” said Phil Hewitt, director at EnAppSys and a 20-year veteran of energy markets.
“In summary the price cap will need to rise again.”
Hewitt and others in the industry expect the eventual increase to the price cap to be far lower, probably closer to £100 or £200 next spring, because of government intervention, such as state-backed loans to energy companies, to cushion the impact of record prices over the winter.
But the total costs of higher wholesale prices will need to be paid eventually, either by bill payers or out of general taxation.
One option, which is normally used when smaller retail suppliers fail, is to spread the cost over all household energy bills for a number of years but in the past these amounts have been far smaller.
The EnAppSys figures suggested all households could face higher energy bills for some time even if prices cool off next year if the government chooses that route. The alternative would be to cover the costs out of general taxation and borrowing, but the Treasury is said to be worried about the expenditure.
Energy prices have soared as the gas market has been hit by stronger demand as economies recover from the depths of pandemic restrictions last year, while supplies have been tightened by stronger liquefied natural gas demand and lower supplies from Russia.