UK Energy Burden Set to Shrink as Wholesale Prices Fall
(Bloomberg) — The UK’s energy subsidies for households could plunge to a sliver of their current levels with wholesale prices set to drop and consumers picking up more of the tab.
Government support may fall to £3 billion ($3.62 billion) in the fiscal year that begins in April, from £25 billion during the current period, according to estimates by Investec Plc.
That’s mainly because by July, energy bills are poised to fall below the price cap set by the government. Relatively mild weather so far this season has contributed to lower-than-expected power and natural gas prices, easing the burden on Prime Minister Rishi Sunak’s administration as soaring energy costs fuel historic inflation.
“This must be a relief to government,” wrote Investec analyst Martin Young. “Households would also benefit, but prices remain elevated vs. historic levels, and with other bills rising, the cost-of-living crisis remains real and devastating for many.”
While wholesale energy prices are declining now, they will only filter through in months to come. That’s because suppliers are instructed by regulator Ofgem to buy their energy months in advance of when it’s needed — called hedging — to prevent financial risks from volatility.
Energy prices soared across Europe after Russia curtailed natural gas supplies to the region amid its war in Ukraine. With consumers facing high power costs, the UK pledged about £60 billion in energy-bill aid for households and businesses until April.
Ofgem has long set a price cap — based on wholesale prices — to limit the amount that suppliers can charge. As the crisis unfolded last year, prices soared, squeezing customers. In October, the government set its own Energy Price Guarantee to determine what households can be charged for energy. The government has been compensating suppliers for wholesale costs above the EPG level.
The EPG is set to rise to £3,000 a year from April, from £2,500 currently. Meanwhile, Ofgem’s price cap could fall as low as £2,640 from July, according to Young, who advocates a social tariff so poorer households pay less than average.
The tariff caps are representative of what a typical household would pay for their energy each year, based on limits of unit costs of electricity and gas. The government is separately subsidizing business energy costs through another program.
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