UK households face rising energy bills as European gas stocks remain low

Households across the United Kingdom are being advised to prepare for increased energy costs this winter as European nations rush to replenish their natural gas reserves ahead of colder weather. Wholesale natural gas prices have already reached three-year highs, a trend that is expected to translate into higher bills for both businesses and consumers. The situation has arisen because European countries delayed their summer stockpiling due to elevated wholesale costs initially sparked by the conflict in Iran. These nations had gambled that the hostilities would conclude before winter, allowing prices to fall, but storage levels remain significantly below normal for this time of year. Consequently, countries now face the prospect of purchasing gas at a premium or enduring higher prices during the winter months.

The European benchmark natural gas price exceeded 75 euros per megawatt hour on Wednesday, marking its highest level since late 2022. That previous spike was driven by Russia’s invasion of Ukraine. In the United Kingdom, natural gas prices topped 185 pence per therm this week, also the highest figure recorded since late 2022. The recent price jump coincides with renewed hostilities between the United States and Iran. Analysts fear that the resumption of fighting will keep the Strait of Hormuz closed for an extended period. This waterway is critical for global energy supplies, as approximately one-fifth of the world’s oil and liquefied natural gas is typically transported through it.

Hamad Hussain, a senior climate and commodities economist at Capital Economics, stated that he does not expect the strait to begin reopening until early 2027. Even once the waterway reopens, there will be a lag before energy flows freely and pressure on prices eases. Hussain warned that the risks to gas prices are tilted towards the upside and predicted that the price would top 80 euros by the end of the year. He recalled that gas storage operators had indicated they would wait three to four months for the crisis to ease before stocking up. However, the strait has now been effectively closed for about six months without the anticipated resolution.

Higher wholesale gas prices feed directly into household energy bills by influencing the price cap set by the regulator Ofgem. The energy price cap rose in July and is scheduled to increase by 4 per cent in October, which will leave a typical household paying 1,723 pounds. Analysts at the energy consultancy Cornwall Insight have forecast that domestic energy prices could rise by a further 9 per cent in the new year. Dr Craig Lowrey, a principal consultant at Cornwall Insight, noted that a fresh increase in wholesale prices would increase pressure on the January price cap forecast. However, he cautioned that there is still time for wholesale prices to fall, which could ease the pressure on consumers.

The Department for Energy Security and Net Zero stated that gas prices are determined on international markets and dismissed criticism regarding the UK’s own low levels of storage. Chris O’Shea, the boss of British Gas owner Centrica, has repeatedly called for government support to expand the Rough storage facility in the North Sea. He warned that it has been unviable to fill the facility and that it will close next year without a deal. O’Shea expressed concern on social media that the UK has almost no gas in storage for the coming winter, describing energy security as national security. A departmental spokesman responded that the government remains open to discussing proposals for all gas storage sites, provided they offer value for money for taxpayers. The department also highlighted the Prime Minister’s pledge to cut value added tax from energy bills from October, alongside government actions to reduce Britain’s reliance on natural gas.

Ángel Talavera, chief European economist at Oxford Economics, described the current situation as a mixed picture. While wholesale gas prices are significantly lower than during the crisis following Russia’s full-scale invasion of Ukraine, households and businesses will still face higher than usual energy bills over the coming months. Talavera characterised the situation as serious but not catastrophic, noting that something would have to change dramatically to lower prices. He pointed to a reduction in demand for natural gas due to the shift towards renewables, but emphasised that the overall picture depends heavily on winter weather. A warmer winter would benefit demand, whereas a colder than average winter would drive up energy demand and push prices higher. It is currently unknown how the developing El Niño phenomenon over the Pacific Ocean will impact Britain’s winter, as previous El Niño winters have varied significantly in temperature. Talavera suggested that gas prices could fall if weather helps reduce demand and the Strait of Hormuz reopens sooner than expected, but noted that the weather remains the primary hope for relief.

This energy uncertainty comes as a recent spike in UK government borrowing costs has eased. After a sharp rise on Tuesday that took the yield on a 10-year bond to its highest level since 2008, yields fell back slightly on Thursday. They are currently hovering around 5.15 per cent, which would still represent a post-2008 peak were it not for the recent jump.