Analysts anticipate a substantial drop of over £1,200 in the UK’s household energy price cap in July. This is due to a significant decline in wholesale gas and electricity prices, which will alleviate some pressure on the government dealing with the cost of living crisis.
Investment bank Investec’s final projection for the July price cap is £2,044, expecting it to further decrease to £1,933 in October. Cornwall Insight, a consultancy firm, estimates the cap to reduce to £2,054 in July and then to £1,976 in October.
These projections stand in comparison to the current price cap of £3,280 and indicate that energy bills will likely fall below the £3,000 threshold for comprehensive government support from July onwards.
The definitive cap will be declared by Ofgem, the energy regulator, on Thursday. Given the timeline, it’s unlikely that any fluctuations in the wholesale price will impact the July cap, suggesting that these estimates are likely accurate.
Investec’s revised predictions on Friday are slightly lower than their previous estimates made on May 3, which were £2,051 for July and £2,080 for October.
The government intervened last year to subsidise energy bills when wholesale prices spiked dramatically – up to eleven times – due to Russia cutting gas supplies to Europe in the wake of Ukraine’s invasion.
However, despite these reductions, the price cap will still be nearly 60% higher than the pre-energy crisis levels of under £1,300. This implies many households will continue to face financial challenges.
Investec noted that “Consumer pricing will be at levels not seen since last summer, but still challenging for many.”
The ceiling on how much energy providers can charge customers under default tariffs, which encompassed over 90% of UK households as of March, constrains the per-unit cost of gas and electricity. This annual limit mirrors the predicted consumption for average households.
Between its introduction in 2018 and 2022, the cap fluctuated between £1,104 and £1,277. However, due to a spike in wholesale prices, it jumped to £3,549 in October 2022 and further to £4,279 in January 2023.
The peak of British wholesale gas prices nearly touched 600p per therm in August 2022, a stark contrast to the long-term average of below 50p per therm.
The government stepped in to control the energy price surge through a price guarantee, capping the typical yearly bill at £2,500 from October 2022 and compensating suppliers for the discrepancy between this limit and the price cap. The eligibility threshold for this support is scheduled to increase to £3,000 by July 1.
The price guarantee scheme, set to continue until next March, is projected to cost taxpayers an estimated £29.4bn, as per data from March.
After a relatively mild winter and successful energy-saving efforts and alternative source utilization in Europe, wholesale prices have seen a downward trend. The gas price for the third quarter of 2023 was trading around 75p per therm this week.
Investec forecasts a decrease in the wholesale energy component of bills from £2,223 in April to £1,030 in July.
European gas prices plunged to their lowest since June 2021 on Thursday, falling below €30 per megawatt hour, approximately equivalent to about 78p per therm.
