Energy prices: Households pay as the UK gambles on volatile gas market

Users of prepayment meters have historically paid more because energy companies had to send staff around to empty what were once coin-operated electricity and gas meters, which increased running costs. However, it has been common practice for many years for users to top up at shops using a card or key fob, eliminating the need to collect cash from homes.

Jeremy Hunt delivered his first full Budget as Chancellor on March 15 (Image: Archant)

Chancellor Jeremy Hunt said that as of July 1, energy costs for those with prepayment meters will be brought “in line with comparable direct debit charges”, bringing an end to “the premium paid by our poorest households”.

Well, better late than never. No one is going to denounce the demise of a patently unfair system – particularly at a time when every penny is a prisoner – but then again the estimated savings of £45 a year is a drop in the ocean compared to bills more than double what they were two years ago.

Mr Hunt also announced a U-turn on the energy support bill which for the last six months has capped prices for the average UK household at £2,500 per year. The Energy Price Guarantee (EPG) – which limits the amount that households pay per unit of gas or electricity until October 2024 – was due to increase to £3,000 from April.

The EPG is different to what is commonly known as the energy price cap set by industry regulator Ofgem, which limits what companies can charge while still allowing them some profit. Because the EPG is lower than the energy price cap – which rose from £1,277 per year in October 2021 to £4,279 in January 2023 – the government has been paying the difference to energy companies.

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By extending the £2,500 EPG limit for a further three months to the end of June, Mr Hunt is gambling that recent falls in gas and electricity prices are set to continue. Wholesale gas prices have declined by more than 70 per cent since August of last year, making the extension of the EPG a safer and cheaper bet than it was a few months ago.

That said, a 70% decline on prices that have increased by more than 230% doesn’t get us anywhere close to the cost of gas and electricity prior to the current energy crisis. The squeeze on consumer budgets will continue, particularly as the Energy Bills Support Scheme which has returned £66 to every household in each of the last six months will close as planned at the end of this month.

It’s also worth noting that while the EPG will be held at £2,500 for an extra three months, there has been no equivalent assistance for small and medium-sized businesses which have had wholesale prices fixed since October under the government’s Energy Bill Relief Scheme. This will be replaced as planned in April by the scaled-back Energy Bills Discount Scheme, which will give firms a reduction on wholesale prices rather than costs being capped.

Mr Hunt is wagering that all of this will come good in the end amid increasing confidence that energy prices are becoming less volatile, with analysts at Cornwall Insights predicting that Ofgem’s energy price cap will fall to £2,153 in July and remain close to that level for the rest of this year. The prevailing wisdom is this will allow consumers and businesses to “lock in” to contracts at more affordable prices.

This ideal scenario is possible, but market volatility since global lockdown measures eased has proven that the only certainty is uncertainty.

Global gas prices have fallen because of the relatively mild winter across Europe, the EU’s gas stocks strategy, and China’s lockdown policies, which reduced gas demand. But China’s zero-Covid policy has come to an end, and predicting the severity of next winter’s weather is an educated guess at best.

As for gas storage, this is prime example of the UK’s knee-jerk approach to energy policy.

In June 2017, energy giant Centrica announced the closure of the Rough gas storage site on the grounds that it was uneconomical and had reached the end of its design life. Located 18 miles off the Yorkshire coast, the depleted gas field opened as a storage facility in 1985, the year before British Gas was privatised. Its closure took out more than 70% of the UK’s storage capacity, with remaining facilities capable of stockpiling just 2% of annual demand.

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Previously sanguine about a lack of storage, the government has recently held talks with Centrica to find a commercially viable solution for Rough – yet more reactionary policy development.

Which brings us to what was absent from last week’s Budget: a coherent strategy to reduce energy demand.

UK homes are among the most inefficient in Europe; keeping them warm is estimated to account for 17% of all greenhouse gas emissions, with too many people paying for heat that simply escapes.

According to the Energy Savings Trust, retrofitting “is the quickest and most effective way to bring down bills and reduce carbon emissions”. What is needed are bolder programmes to make our existing homes more energy efficient.

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Yet even those who do have the means to upgrade are at risk of missing out amid a huge shortage of workers trained in the installation of insulation, solar panels, double glazing and heat pumps. Campaigners are calling on the government to invest in a major retraining programme to remove the staffing bottleneck.

The Energy Savings Trust says there is more than £2 billion of energy efficiency funding pledged in the 2019 Conservative Party manifesto which remains unallocated.

It is time to put this to use. Short-term price guarantees – along with campaigns to encourage the mass adoption of heat pumps that aren’t even suitable for many homes – are no substitute for a solid long-term strategy.