Household energy bills could climb by £160 a year from this summer after the war in Iran pushed the UK’s gas market to a three-year high.
A typical combined household gas and electricity bill could reach £1,800 a year in Great Britain under the government’s quarterly price cap from July, according to analysis by Cornwall Insight, an energy consultancy.
It forecast a 10% surge in household energy costs after prices on the UK’s gas market doubled in the days following the US-Israeli attack on Iran. Tehran has retaliated by halting oil and gas shipments through the strait of Hormuz.
The unit cost of gas and electricity will remain steady over the coming months after the regulator, Ofgem, last month fixed household energy costs for the period from April to July at £1,641 a year. That represents a £117 cut from the January-March cap for millions of households but is lower than the £150 a year reduction the chancellor, Rachel Reeves, had promised in last year’s budget.
Ofgem will recalculate the costs faced by energy suppliers for the next quarter, taking into account the recent rise in market prices.
Motorists are already facing a hike of 2.5p a litre at the petrol pumps since Saturday, while diesel prices have climbed by more than 3p after the global oil benchmark rose above $81 a barrel.
In the UK, energy markets have recorded some of the steepest price rises in the world because of the country’s heavy reliance on gas for electricity generation combined with limited gas storage capacity.
Jonathan Brearley, the chief executive of Ofgem, told MPs on Wednesday that it was “genuinely too early to tell” how high energy bills may climb because it will depend on how long wholesale prices remain elevated.
If the strait of Hormuz – through which about 20% of global oil supplies and about 20% of seaborne gas shipments pass – remains closed for a prolonged period it would create “significant upward pressure” on energy bills, Brearley said. He added that the UK was in a “significantly stronger position” than it was before the 2022 Russia-Ukraine crisis due to its diverse range of gas sources.
Ed Miliband, the energy secretary, said the government was continuing to monitor the situation in oil and gas markets.
He said: “Conflict in the Middle East is yet another reminder that the only route to energy security and sovereignty for the UK is to get off our dependence on fossil fuel markets, whose prices we do not control, and onto clean homegrown power we do.
“Kemi Badenoch argued today that new North Sea licences could cut bills. The only problem is that her own shadow energy secretary correctly admitted it won’t, because oil and gas is sold on international markets. The North Sea will continue to play an important role in our energy mix for decades to come, but new licences won’t take a penny off bills.”
Reeves met North Sea bosses on Wednesday afternoon to discuss the upheaval in global energy markets.
Before the attack on Iran, many in the industry had expected the chancellor to announce changes to the North Sea windfall tax, known as the energy profits levy, in her spring forecast on Tuesday.
After Wednesday’s meeting, a government source said: “The chancellor was clear with industry that she wants the energy profits levy to come to an end. She has made that promise and she stands by it.
“Indeed, it was a commitment she wanted to make this week, but the crisis in the Middle East has had real-time consequences on oil and gas prices and it is right that we respond to this.”
Market experts warned that the UK’s reliance on gas imports for heating and electricity generation, combined with low gas storage capacity, has left it more exposed to market volatility than countries in continental Europe.
Andreas Schroeder, the head of gas analytics at ICIS, said: “The big difference between Britain and continental Europe is the availability of gas storage.
“Abundant storage in central Europe helps as a buffer and cushion against price shocks out in the world. For the time being, Europe will draw further on its already poorly filled gas storage sites. Britain has no alternative to Norwegian pipeline gas except [liquefied natural gas imports].”
Tom Marzec-Manser, a director at consultancy Wood Mackenzie, said the closure of Britain’s last coal-fired power plants also meant the UK was unable to switch from gas to coal generation as some on the continent could.
Craig Lowrey, the principal consultant at Cornwall Insight, said: “Events like this reinforce the case for greater home-grown renewable generation. Reducing the UK’s reliance on volatile global gas markets is the most durable way to protect households from future price shocks.”
