Millions of households across Britain are facing another increase in energy costs this autumn after the energy regulator Ofgem announced that its domestic price cap will rise by 4%
from October.
The new cap will increase the typical annual bill by £60 to £1,723, adding further pressure on household budgets at a time when the government is seeking to reduce the cost-of-living burden. The increase affects roughly 22 million households on variable-rate energy tariffs, with the price cap applying to about 65% of domestic customers.
The rise will be an unwelcome development for Prime Minister Andy Burnham, whose government has made easing household financial pressures a key priority. The increase also largely offsets the benefit of measures announced by the government last month to reduce the tax burden on electricity bills.
Ofgem said the main reason for the higher cap was the sharp increase in wholesale gas prices on international markets.
“High international gas prices are continuing to drive energy costs in the UK,” Ofgem director general for markets Neil Kenward said. He also welcomed the government's decision to remove VAT from electricity bills, saying the measure had prevented households from facing an even larger increase in winter energy costs.
Wholesale gas prices surge
Britain's exposure to volatile international gas markets has intensified since the outbreak of the conflict involving the United States and Iran. Wholesale British gas prices have more than doubled since US military action began on February 28, with disruption to shipping through the Strait of Hormuz contributing to the sharp rise.
The strategically important waterway carries a significant share of the world's liquefied natural gas supplies, making any disruption there particularly important for energy-importing countries such as Britain.
Wholesale energy costs represent the largest component influencing Ofgem's quarterly price-cap calculations. The regulator's formula also takes account of network charges, government policies and other costs incurred by energy suppliers.
The latest increase means households are entering the winter with higher expected heating and electricity expenses, raising concerns about renewed pressure on family finances.
Energy Minister Miatta Fahnbulleh said the government understood the concerns surrounding winter bills and would continue examining ways to shield households from unaffordable energy costs.
The government's decision to remove VAT from electricity bills helped limit the latest increase. According to Ofgem, without the measure the price cap would have been approximately £45 higher. Earlier in the year, the government also moved some policy costs away from household electricity bills, a measure intended to reduce the average annual energy bill by around £150.
Further increases could be ahead
The latest rise may not be the last. With the conflict between Washington and Tehran showing little indication of ending, energy analysts expect international wholesale prices to remain elevated.
Cornwall Insight estimates that, if current wholesale prices persist, Ofgem's price cap could rise by another 9% in January, potentially pushing the typical annual bill to around £1,872.
Craig Lowrey, a principal consultant at the energy consultancy, warned that even a rapid end to the conflict would not necessarily lead to cheaper household bills this winter.
Lower gas stocks heading into the colder months, combined with the seasonal increase in demand, could keep prices elevated even if geopolitical tensions ease.
For British consumers, the prospect of another increase in January underlines the continuing vulnerability of household energy bills to international gas markets and geopolitical shocks far beyond the UK's borders. Photo by Hamed Saber, Wikimedia commons.
