Will energy bills go down this year?

Energy prices are beginning to drop and households could see cheaper rates for their gas and electricity by the summer. 

When energy prices soared after Russia’s invasion of Ukraine, said BBC News, the government announced a limit of £2,500 on the typical amount that households could be charged for each unit of energy they use since October 2022, called the energy price guarantee (EPG). 

Without this, pricing would have been set by energy regulator Ofgem’s price cap, which was £3,500 between October and January, before rising to £4,279 at the start of this year. 

Chancellor Jeremy Hunt had announced in his Autumn Statement last year that the EPG would rise to £3,000 from 1 April, but “since then energy prices have fallen by 50%”, the government said. 

Additionally, the latest Ofgem price cap for April to June fell to £3,280 and is predicted to decline further so Hunt froze the EPG at £2,500 to “bridge consumers into the summer”. 

It looks as if energy prices will fall sharply in the second half of this year, said MoneyWeek, with “some experts saying we could see prices similar to what we had back in mid-2022”. 

Why have energy bills been rising? 

Energy prices are “determined by a range of factors beyond just the amount of energy 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 and “many industries, places of work and leisure facilities were then in need of more energy which put unprecedented pressures on suppliers”, explained This Is Money. 

Russia’s invasion of Ukraine around a year ago 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, said uSwitch, so “the cost of buying the gas means it costs more to produce the electricity, and those costs are then passed on to customers”. 

What has been done to help?

Fixed tariffs used to give households some certainty regarding their payments. These were kept low by competition in the energy market, but “they are currently few and far between”, said Which?. The alternative to fixed tariffs 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. 

The Ofgem cap was set to hit £3,549 in October 2022. But then the government stepped in, launching its EPG during Liz Truss’s short stint as prime minister. This guarantee caps the rate suppliers can charge for each unit of energy to protect customers from steep bill hikes. With the policy in place, the average typical household bill is currently capped at around £2,500 per year. 

Most domestic energy customers are also benefiting from a £400 discount on their bills, which launched in October and runs until the end of March 2023. Suppliers have been taking £67 off customers’ monthly payments to cover this.

The government has also spent £18m 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?

An “unseasonably mild winter”, plus “fears of a global economic slowdown and weak oil demand in China” have resulted in falling gas prices, said the Financial Times. 

The UK’s demand for gas has also dropped, “as strong wind speeds and high levels of imports from continental Europe have cut the amount of gas used for electricity generation”, the newspaper said, adding that traders are becoming confident in their ability to refill gas storage sites across Europe from the spring, despite lower Russian exports.

Due to this, energy analyst Cornwall Insight now estimates that energy bills for a typical household could drop to around £2,024 during the third quarter of this year – 19% below the government’s EPG. It then predicts energy bills could be around £2,076 for an average household by the end of the year. This is a slight rise from the summer rate, said MoneyWeek, but still 17% lower than the EPG.   

Investec also predicts Ofgem’s energy price cap could be set at £1,981 for the third quarter of this year and £1,966 in the fourth. 

This reflects a fall in wholesale energy prices, said MoneyWeek, but it’s important to note it’s just a projection at this stage. “Energy markets are volatile, and we don’t know what’s around the corner. Another spike in gas prices could nullify these projections.” 

How much will this help?

While a drop in energy prices is positive, households are still facing higher costs.

Even with the government’s decision to keep the EPG at £2,500 for an average household until July, Which? research has found that millions of low-income consumers will still face higher energy bills this financial year. Consumers will still be paying almost double the amount they paid before the energy crisis began, the consumer group said, and households will no longer benefit from the £400 discount.  

Ofgem’s July and October caps are forecast to be below £3,000, taking it below the EPG, said Sky News, which warned that “the pressure will not be removed entirely”. Ofgem chief executive Jonathan Brearley said prices are still not going to fall to the levels seen in recent years. He said the latest price cap “reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began”.

While it won’t make an immediate difference to consumers, he added, “it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease”.

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. This article is based on information first published on The Week’s sister site, The Money Edit