Energy bills to fall – but more pain to come

August 2023

Energy bills will fall to £1,923 a year for the typical household from October, under the new price cap announced today by industry regulator Ofgem.

 

The current price cap of £2,074 will reduce to £1,923 from October 1 – a fall widely anticipated in many quarters but not as much as some analysts had predicted.

 

What does this mean for consumers and businesses? In real terms, it will mean a small drop (£151) in energy bills for the typical household, although the cap applies to the unit price of energy – if more energy is used, the bills will be higher.

 

While the price cap decrease will provide some welcome relief for consumers and businesses, it is still well above pre-pandemic levels. Even in the last COVID lockdown, in winter 2021, the cap was set at a comparatively modest £1,277.

 

The current price cap is also likely to rise again in three months, when Ofgem announces the new cap in January 2024. Demand for electricity and gas is at its highest in winter, so many householders and businesses will feel more pain.

 

In the mid to long term, there is still much uncertainty around wholesale energy prices, driven by global events that are outside of the industry’s control. How long will the Russia-Ukraine conflict last? What impact will potential industrial action at Australian liquified natural gas (LNG) production facilities have on prices? Events such as these, as well as unusual weather patterns and unforeseen power plant outages, pose significant risks to UK energy prices – risks that create nervousness and uncertainty for UK households and businesses.

 

The risks could be alleviated by various strategies, such as ramping up power generation from renewable sources and incentivising households and businesses to reduce energy consumption during periods of peak demand. However, there is no magic bullet and energy prices look set to stay high for the foreseeable future.