UK energy bills could start to rise again due to the rise in wholesale gas prices, just as consumers thought prices would continue to fall.
The average household already pays £1,843 a year in energy bills because it has a deal regulated by the Ofgem price cap.
But there are fears these prices could rise following increases in gas and oil prices after Hamas terrorists invaded Israel on October 7.
Both UK energy regulator Ofgem and analysts at Cornwall Insight have warned that UK households are likely to see volatile and likely higher gas bills as a result.
Unwelcome guest: Britain faces steeper gas prices this winter due to rising wholesale costs
At the moment, experts think energy bills will rise by just over £50 a year for the average home from January, and not just as a result of the war between Israel and Hamas.
But if the situation escalates and further damages gas supplies from the Middle East, Britain and other countries could see a much steeper increase in energy bills.
Last week, Jonathan Brearley, CEO of UK energy regulator Ofgem, said: ‘Recent global events underline my view that we need to plan based on the fact that wholesale markets could remain volatile and prices high for some time to come.
“None of us can predict the future, but in my view the high and volatile prices we see today are the best working assumption. With recent global events putting increasing pressure on gas prices, it is likely that bills will continue to rise this winter.”
Here’s how UK energy bills are likely to change in the coming months.
Why might energy bills rise?
Due to an increase in wholesale gas prices, which make up the majority of the price of consumers’ gas bills.
These prices fell in 2023, but started to rise after the Palestinian group Hamas invaded Israel on October 7 and started a war.
The main reason this conflict caused wholesale gas prices to rise is because Israel closed its offshore Tamar gas field after the war started.
Energy experts are also concerned that the conflict could escalate, affecting the flow of gas from other parts of the Middle East.
On the rise: Wholesale gas prices rose sharply in October to a high since April (Source: Trading Economics)
This is a particular problem now that Russia has cut off gas supplies to Europe after invading Ukraine in 2022, while the flow is still intermittent.
However, the latest conflict in the Middle East is not the only reason why wholesale prices are rising – and may continue to rise.
Cornwall Insight also pointed out that Australian gas workers are set to resume strikes at the Gorgon and Wheatstone gas works, with their industrial action in September set to trigger a rise in wholesale prices.
Similarly, energy experts are concerned that the same thing could happen elsewhere due to a damaged gas pipeline between Finland and Estonia, possibly the result of sabotage.
Are wholesale electricity prices increasing?
The good news for now is that wholesale electricity prices – and therefore consumer electricity bills – are stable and do not appear to be affected by the conflict.
When do the bills change?
Not immediately. The energy bills are based on wholesale prices, but not in real time.
This is because wholesale energy costs fluctuate widely. To get around this, energy companies ‘cover’ themselves by purchasing gas and electricity well before they are needed.
They can do this months or even years in advance when they really need it.
It means that our current monthly bills do not reflect current prices, but rather the wholesale costs from when the supplier first paid for the energy.
So it may take a while before low wholesale prices reduce energy bills. There are several ways to keep an eye on wholesale costs, including the current price and the upcoming season, and they all need to drop to impact energy bills.
For most consumers, changes in wholesale prices are not an immediate problem for another reason.
The vast majority of energy deals do not closely monitor wholesale prices, with rare exceptions such as the recent tracker tariff launched by Octopus Energy.
Instead, more than 90 percent of British households pay energy bills capped by the Ofgem price cap, which is reset four times a year.
The next reset is at the end of December, meaning there will be no change to capped energy bills before this point.
Go up? Energy bills could rise as a result of the conflict between Israel and Hamas, but the impact will not be felt immediately as companies buy gas well before it is actually needed
The remainder of households not covered by the price cap will receive a fixed-rate energy deal, which again will not change until the fixed term expires.
Changes in wholesale prices do affect the price of new flat rates, but the cold comfort for consumers is that there are very few of these on the market at the moment.
Meanwhile, Craig Lowrey, chief advisor at Cornwall Insight, said: ‘The daily fluctuations in our price ceiling forecasts reflect movements in the underlying wholesale energy market.
‘This highlights the vulnerability of UK energy prices – and customers’ bills – to geopolitical events and makes it all the more urgent that the Government look to reduce the country’s dependence on imported energy, by prioritizing sustainable, domestically produced energy to to help stabilize prices.’
How much could the energy bill increase?
Currently the average energy bill is £1,834 per year, for a household using a typical amount of energy and at a variable rate limited by the Ofgem price cap.
Ofgem makes no predictions about the price cap, and even CEO Brearley’s comment that bills could rise this winter is unusual.
However, Cornwall Insight has a track record of accurately predicting movements in Ofgem’s price cap, and believes bills will rise in the short term.
Cornwall Insight thinks the average bill will rise by £54.97 per year from January 1, 2024, then fall to £1,819.60 in April, fall again to £1,781.37 in June and rise again to £1,825, 21 in October.
However, all these figures have been worked out using new Ofgem calculations for what the average energy bill looks like, which it started applying from October 1 this year.
For a fair comparison with energy bills before October 1, Cornwall Insight thinks the average energy bill will rise to £1,996.23 in January, fall to £1,912.39 in April, fall again to £1,872.41 in June and then will rise to £1,922.20 in October next year. year.
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