British consumers are set to see a big drop in energy bills that have been crippling household budgets since the start of the war in Ukraine.
Gas prices have been declining steadily since late last year and this will finally feed through to hard-pressed consumers, with average bills set to fall 37% from July, according to a cap set by UK energy regulator Ofgem.
Ofgem’s mechanism limits how much suppliers can charge per unit of energy. On an annual basis, the typical household would face a bill of £2,074 in the third quarter.
While energy costs remain above pre-invasion levels, the drop will help the Bank of England in its struggle with inflation, which at 8.7% in April was four times above the target level. BOE officials have driven interest rates to the highest since 2008 to head off an upward spiral in prices triggered by the jump in energy costs that came with Russia’s attack on Ukraine.
While natural gas and electricity prices have fallen sharply since then, ending a spell of double-digit inflation, those higher costs have prompted second-round increases in everything from food to used cars and mobile-phone plans. The BOE has said it’s determined to return inflation to the 2% target, a sign it may increase interest rates again if high inflation persists.
The new price level will be below the UK’s Energy Price Guarantee, a government subsidy that kicks in if prices rise above a certain level. The measure ensured household bills were capped below the market rate when prices soared to record highs. Currently, it’s set at £2,500.
Gas prices in the UK and Europe have dropped 65% so far this year. The falling prices mean competition is starting to re-emerge in Britain’s retail energy market. Still, consumers who lock into a fixed-price deal now may end up paying more than they would have otherwise if prices continue to fall or even stay stable.
“While bills are falling, the cap is still expected to remain comparatively high against historic norms, and those hoping to see a return to the kinds of bills seen at the start of the decade will be disappointed,” said Craig Lowrey, consultant at Cornwall Insight. “Regrettably, it looks as if these prices may become the new normal.”
--With assistance from Reed Landberg.
