Posted: Fri 3rd Nov 2023

Energy price cap set to rise due to growing volatility in global wholesale cost

News and Info from Deeside, Flintshire, North Wales
This article is old - Published: Friday, Nov 3rd, 2023

The financial outlook for UK energy consumers remains challenging as the Default Tariff Cap, which limits the rates energy suppliers can charge, is expected to rise in response to the global wholesale energy market’s volatility.

According to analysts Cornwall Insight, a typical dual fuel user’s bill could rise to £1,923 annually from January, with a further, albeit slight, increase anticipated in April 2024.

The cap, already set to rise at the start of the year, was previously predicted to dip below the current rate of £1,834 for the rest of 2024. Yet, the latest forecasts project that the cap will likely stay above this level throughout the year.

International incidents have had a pronounced effect on these forecasts. Disruptions in energy infrastructure, geopolitical conflicts, and industrial actions across the globe have led to a 5-6% hike in price cap predictions. The UK’s shift to Liquified Natural Gas (LNG) amidst reduced reliance on Russian gas has left it particularly vulnerable to these global supply chain disruptions.

The Balticconnector incident in Finland, although not directly affecting supply, has raised concerns over potential future disruptions, contributing to market unease. Similarly, conflict in Gaza has affected gas outputs to Egypt’s LNG processing facilities, and industrial action in Australia has impacted its LNG exports.

Dr Craig Lowrey, Principal Consultant at Cornwall Insight said:

“The jump in price cap predictions since September has once again highlighted the vulnerability of UK energy prices – and customer bills – to geopolitical events. The Russian invasion of Ukraine demonstrated there is a delicate balance in the global energy market which can easily be disrupted by unexpected events, it looks as though the current situation is repeating that pattern.

“The government needs to take steps to proactively limit the impact that such situations have on the UK’s energy market, and already stretched households, rather than reacting to events as they occur. Stop-gap measures such as social tariffs and one-off payments are helpful, but they are not a long-term solution.

“While the UK will never be entirely protected from global price increases, reducing the country’s reliance on imported energy and prioritising sustainable, domestically sourced energy will help protect the country from international energy shocks, and work to stabilise prices over the next decade.”

Richard Neudegg, director of regulation at Uswitch.com, comments: “As temperatures fall and we start to use more energy at home, predictions that energy prices might rise will cause real nervousness in households on the standard variable tariff.

“Cornwall Insight’s revised predictions on where the price cap could go reflect an increased level of uncertainty in the wholesale market.

“This new analysis serves as another reminder that – as the price cap is now refreshed every three months – consumers on standard variable tariffs are particularly exposed to fluctuations in the wholesale energy market.

“Risk of volatility is part of the reason why consumers value the certainty offered through fixed rate deals.

“The regulator needs to do more to encourage suppliers to offer fixed deals more widely and at more competitive prices.

“The price cap is no longer fit for purpose, and the system needs reforming in a way that protects households but also puts pressure on suppliers to do better on price and innovate to create genuine points of difference.”

 

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