Households across the UK are being warned to prepare for higher energy bills this winter as European countries work to replenish their natural gas supplies before colder weather arrives. Wholesale natural gas prices have reached three-year highs, which may result in increased energy costs for both businesses and consumers. European nations had postponed their summer stockpiling due to elevated wholesale prices driven by the conflict in Iran, hoping the situation would stabilize before winter and prices would decrease.
Current storage levels are significantly lower than typical for this time of year, with countries now facing the choice of purchasing gas immediately or risking higher prices as winter approaches. The European benchmark natural gas price surpassed €75 per megawatt-hour (MWh) on Wednesday, the highest since late 2022, following a spike related to Russia's invasion of Ukraine. In the UK, natural gas prices have also reached 185 pence per therm, marking the highest level since late 2022.
The recent price increases have been attributed to renewed hostilities between the US and Iran, raising concerns that the key Strait of Hormuz may remain closed for an extended period. This waterway is crucial for the transportation of approximately 20% of the world's oil and liquefied natural gas (LNG). Hamad Hussain, a senior climate and commodities economist at Capital Economics, stated that he does not expect the strait to reopen until early 2027, and even then, there would be a delay before energy flows freely, maintaining upward pressure on prices.
Hussain noted that the risks to gas prices are skewed towards increases, predicting that prices could exceed €80 by the end of the year. He recalled discussions with gas storage operators at the onset of the US-Israeli conflict in Iran, who indicated they would wait three to four months for the situation to improve before increasing their stockpiles.
The rise in wholesale gas prices directly influences household energy bills, as it affects the price cap set by the regulator Ofgem. The energy price cap increased in July and is set to rise by 4% in October, resulting in an average household bill of £1,723. Analysts from the energy consultancy Cornwall Insight forecast that domestic energy prices could rise an additional 9% in the new year, raising concerns for households during the winter months.
Dr. Craig Lowrey, a principal consultant at Cornwall Insight, indicated that an increase in wholesale prices would heighten pressure on the January price cap forecast but acknowledged that there is still time for prices to potentially decrease. The Department for Energy Security and Net Zero (DESNZ) stated that gas prices are determined by international markets and dismissed criticism regarding the UK's low storage levels.
Chris O'Shea, CEO of British Gas owner Centrica, has called for government support to expand the Rough storage facility in the North Sea, warning that it may become unviable without a deal. A DESNZ spokesperson mentioned that they are open to discussing proposals for gas storage sites that provide value for taxpayers.
Prime Minister Andy Burnham has pledged to reduce VAT on energy bills starting in October and emphasized government efforts to decrease the UK's reliance on natural gas. Ángel Talavera, chief European economist at Oxford Economics, described the situation as having both positive and negative aspects. While wholesale gas prices are lower than during the crisis following Russia's invasion of Ukraine, households and businesses will still face higher energy bills than usual in the coming months.
Talavera remarked that a significant change would be necessary to lower prices, highlighting the impact of winter weather on demand. A warmer winter would reduce demand, while a colder winter would increase it, thereby raising prices. The potential effects of the developing El Niño in the Pacific Ocean on Britain's winter remain uncertain. Historical data shows that the Big Freeze of winter 2009-10 coincided with an El Niño, while the 2006-07 winter, also an El Niño year, was unusually warm.
Talavera noted that gas prices could decrease if weather conditions reduce demand and if the Strait of Hormuz reopens sooner than anticipated. Currently, he stated, "the weather machine remains our main hope." Additionally, a recent spike in the UK government's borrowing costs has eased, with yields on 10-year bonds, or gilts, hovering around 5.15%, marking a post-2008 peak despite a slight decrease following a sharp uptick earlier in the week.