Lower gas prices will bring only limited relief to Britons

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“Hhe blew and they were scattered,” ran the inscription on English coins after a great storm helped save them from attack by a Spanish armada in the 16th century. This winter, with an energy crisis fueled by Vladimir Putin’s war in Ukraine, Britons may be thanking God for rising temperatures.

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A pan-European heat wave – as well as severe weather for wind farms – has reduced wholesale energy prices across the continent. Unsustainable warmth, rather than energy-saving measures, explained the entire fall in British gas demand from June to October, according to a study by academics at Imperial College London. The weather has been mostly mild since then. The cost of natural gas for delivery in February 2023 fell to around £50 ($61) per megawatt hour on January 1, the lowest price in the month ahead for a unit of gas since June 2022. British households, however, will not see , the benefits of falling wholesale prices. Instead it is the government that pockets most of the windfall.

Retail prices depend on two government policies: price caps set by Ofgem, the energy regulator, which limit what suppliers can charge; and the government’s energy price guarantee (EPG), which sets the unit prices domestic consumers pay for gas and electricity and provides subsidies to make up the difference. In the first quarter of 2023 the cap will be set at the equivalent of an annual bill of £4,279 for a “typical home”, based on typical energy use. The EPG aims to keep bills for such a family at around £2,500.

Households only pay whichever of the two policies sets prices at the lowest level. In other words, when the guarantee keeps bills below the price level, as it is now, the limit does not apply to taxpayers. Just as the government shielded households from the full force of the rise in wholesale gas prices in 2022, they will not benefit from their latest drop.

In fact, “for most people energy prices are going up,” said Emily Fry of the Resolution Foundation, a think tank. The EPG that it will not be so generous in April, because the government is appealing to reduce its cost. A typical household will pay around £3,000 for an annual bill. Although the price cap is expected to fall at the same time – to £3,458, according to Martin Young of Investec, a bank – it will still be above the guarantee. (Higher consumer prices for gas will also increase core inflation, although the Bank of England will focus on underlying price pressures.)

Instead the Treasury will receive most of the benefits from lower wholesale prices. The Office for Budget Responsibility (WORK), fiscal watchdog, forecast in November that the EPG the government would spend around £24.8bn (around 1% of GDP) in the 2022-23 financial year and an additional £12.8bn in 2023-24. That was due to prices peaking at £3.70 per term in the first quarter of this year. Futures markets have predicted that the price for a unit of gas will be around half that level in March. A lot can change, from colder weather to greater demand for gas from China, but the government could save around £10.5bn over the two financial years within the EPG to run, reckons Mr Young from Investec.

Jeremy Hunt, the Chancellor of the Exchequer, will decide how to use those one-off savings – reducing the government’s debt, perhaps, or providing extra funding to tackle the National Service crisis reduce the Health. (A more fundamental change in the long-term outlook for energy prices would be needed before he could begin to cut the tax burden.) He has already recycled some of the money into business support.

On 9 January he announced that the cap on energy costs for companies will be replaced by a new scheme at the end of March, instead of just ending as originally planned. Businesses will then receive a discount of £6.97 per megawatt hour of gas, while wholesale prices will remain above a certain level. The government believes the new scheme will cost £5.5bn compared to the existing scheme WORKan estimate of £18bn for the previous policy. Despite most of what is going on, it will still feel like energy prices are rising for most businesses.

A further drop in wholesale gas prices would bring more relief. These would be passed on directly to consumers and companies, as well as reducing inflationary pressure. For that, the warm weather must hold.

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