Energy bills are set to jump by one third for millions of households this spring after the price of natural gas soared to a new record level on Wednesday, with experts forecasting that worse is yet to come.
Experts now forecast that the energy price cap, which sets a maximum that suppliers can charge for gas and electricity, will have to rise by a further £400 when it is next reviewed by regulator Ofgem in February, coming into effect in April.
The unprecedented jump of almost a third would come on top of the recent 12 per cent price cap increase, which came into effect on 1 October, and follows warnings that 3.5 million people will be unable to heat their homes this winter.
People who are currently on cheaper fixed-rate tariffs will see their bills rise sharply when those deals come to an end.
The alarming increase in energy prices will add to fears of a devastating cost-of-living crunch that is set to hit millions of households, sparking comparisons with the 1970s Winter of Discontent and the period of post-War austerity.
It came as Boris Johnson addressed the Tory Party conference, hailing his ambition to create a high-wage, high-skilled economy on the same day that millions of the poorest families saw their annual incomes slashed by £1,040 after the government pressed ahead with a £20-per-week cut to Universal Credit.
Labour has argued that, as well as throwing many more households into poverty, the £6bn benefit cut will also choke the UK’s faltering economic recovery by taking money out of the hands of those most likely to spend it.
Charities warned that the energy price spike will mean more people will fall into fuel poverty over the coming months. Households are being advised to stick with their current supplier because there are no cheap deals currently available, and as fixed-rate deals end, default standard variable tariffs will be the cheapest options.
The cheapest fixed-rate tariffs now available on price comparison sites are around £500 above the current energy price cap level of £1,277, which is the maximum rate firms can charge on their standard variable tariffs.
Yet the latest 12 per cent rise in the price cap means households still face big increases when their current deals come to an end, with a further spike when the energy price cap is reviewed.
Energy consultants Cornwall Insight predicted that the cap would rise by almost one third to £1,660 based on wholesale energy prices. Pantheon Macroeconomics predicted a similar 33 per cent increase.
In the interim, more energy firms are expected to go bust because they will be unable to absorb record wholesale gas prices, which cannot be fully passed on to customers.
Ultimately, any costs resulting from suppliers failing are borne by consumers through a levy which is recovered through energy bills. Industry analysts say the costs could hit more than £3bn.
Credit ratings agency Moody’s sounded the alarm about UK retail energy suppliers in a report on Wednesday.
Joanna Fic, senior vice president at Moody’s, said: “The cost of energy supplier failures – which could well exceed £1bn and could be a multiple of that in a scenario with a higher number of market exits – and higher energy bills will exacerbate affordability concerns and the risk of credit negative political intervention.”
Customers of failed firms are advised not to switch because they will face higher prices if they do. Ofgem will switch all customers to a new company under the “supplier of last resort” process. Credit balances are protected and must be honoured by the new supplier but customers’ bills are likely to increase when they are switched over.
On Wednesday, the price of natural gas for next-day delivery in the UK hit 400p per therm before falling back to 256p.
Energy is one of a range of essential goods that is rising in price, with businesses across swathes of the economy saying they expect to hike prices further.
Global disruption to supplies and a labour shortage – both of which have been exacerbated by the government’s handling of Brexit – mean that companies are paying significantly more for materials, parts, workers and shipping. Costs must soon be passed on to consumers, business groups say.
Gas prices fell back from their peak on Wednesday afternoon after Vladimir Putin said Russia would step in to help stabilise global energy markets.
The Kremlin’s past statements on gas supplies have fuelled criticism from European politicians who believe that Russia could increase output if it wanted to, but is instead choosing to restrict supply as a way of exerting its power.
Russia wants the EU to green-light the opening of the completed Nord Stream 2 pipeline, which would allow more gas to be pumped from the gas fields of Siberia into Europe. Russia’s state-backed Gazprom is a key source of income for the Kremlin.
The UK is more vulnerable to rising gas prices than other nations because it relies more heavily on natural gas to heat homes.
The UK also has less storage capacity after the government allowed a plant which stored three-quarters of the country’s natural gas to be closed.
Europe is dealing with a shortage of natural gas thanks to a cold winter which left stocks low, before a calm summer with less wind than normal, meaning it was less able to rely on renewable energy.
The problem has been compounded by lower-than-expected gas supplies from Russia and higher demand for liquified natural gas in Asia.