UK households face winter energy bill surge

Households across the UK are being warned to prepare for increased energy bills this winter. Wholesale natural gas prices have reached their highest levels in three years, a situation analysts say will feed through to consumer costs.

European countries delayed their summer stockpiling of gas, gambling that the conflict involving Iran would end before winter and prices would fall. That gamble has not paid off. Storage levels are now significantly lower than usual for this time of year, forcing a potential rush to buy gas now or face even higher prices later.

Wholesale price surge

The European benchmark natural gas price exceeded €75 per megawatt-hour on Wednesday, its highest point since late 2022. In the UK, prices this week topped 185 pence per therm, also a high not seen since late 2022. The recent jump is linked to a return to hostilities between the US and Iran, prolonging the closure of the key Strait of Hormuz. Around one-fifth of the world's oil and liquefied natural gas typically passes through this waterway.

Hamad Hussain, senior climate and commodities economist at Capital Economics, told reporters he does not expect the strait to begin reopening until early 2027. "The risks to gas prices are definitely tilted towards the upside," he said, warning the gas price would top €80 by year's end. He noted that storage operators had planned to wait three to four months for the crisis to ease before stocking up, but the strait has now been effectively closed for about six months.

Impact on the UK price cap

Higher wholesale prices directly influence the UK's energy price cap, set by regulator Ofgem. The cap rose in July and is set for a further 4% increase in October, leaving a typical household paying £1,723 annually. Analysts at Cornwall Insight forecast domestic energy prices could rise another 9% in the new year.

Dr Craig Lowrey, principal consultant at Cornwall Insight, said a fresh wholesale price increase would "increase pressure on our January price cap forecast". However, he cautioned there was "plenty of time to go" and a fall in wholesale prices could ease the pressure.

The Department for Energy Security and Net Zero stated that gas prices are determined on international markets. It dismissed criticism of the UK's low storage levels, while remaining open to proposals for gas storage sites that provide taxpayer value. The department also pointed to government action to reduce reliance on natural gas.

Chris O'Shea, boss of British Gas owner Centrica, has repeatedly called for government support to expand the Rough storage facility in the North Sea. He warned it has been unviable to fill and will close next year without a deal. "We have almost no gas in storage in the UK for the coming winter and this is a huge concern as energy security is national security," he said last week.

A mixed outlook for consumers

Ángel Talavera, chief European economist at Oxford Economics, described a mixed picture. Wholesale prices remain far lower than during the crisis following Russia's full-scale invasion of Ukraine. Yet, households and businesses will still face significantly higher bills than usual. "It's serious, but not catastrophic," he told reporters, adding that "something would have to dramatically change to lower prices".

He pointed to reduced gas demand from the shift to renewables but said the winter weather is a critical unknown factor. A warmer winter would help demand, while a colder one would drive prices up. The impact of a developing El Niño weather pattern on Britain's winter remains uncertain. Talavera said gas prices could fall if mild weather reduces demand and the Strait of Hormuz reopens sooner than expected. For now, he concluded, "the weather machine remains our main hope".

The report comes as a recent spike in UK government borrowing costs eased slightly. The yield on a 10-year government bond fell back on Thursday after a sharp uptick earlier in the week, though it remains around 5.15%.