Economic forecasters could be forgiven for reading the outlook for 2023 through their fingers as strikes, cost of living pressures and a potential global recession paint a gloomy picture. But wholesale gas prices have offered a sliver of optimism, with a sharp fall in recent days. Here’s why they are tumbling – and what it means for consumers.
How much have prices fallen?
European prices for delivery in February fell by 4.3% to €73.7 a megawatt hour on Tuesday, far lower than prices in excess of €300 a megawatt hour last autumn. That’s also lower than levels seen before Russia’s invasion of Ukraine, which pushed already expensive prices even higher.
What is driving down wholesale gas prices?
Recent mild weather in the UK and Europe and the prospect of that continuing over the next couple of weeks is the most immediate factor. These milder conditions have reduced demand for heating, and complemented efforts by households and businesses to cut their energy usage – and bills.
Energy market traders have also been encouraged by the efforts of European nations to fill gas storage facilities – notably with liquefied natural gas sourced from around the world – to reduce their dependence on Russian gas. This eases concerns about shortages this winter and increases optimism about replacing Russian supplies for next winter.
Will these falls in wholesale prices result in lower household bills?
Eventually, yes if the falls are sustained and other factors – such as a sudden bout of cold weather – do not send prices bouncing back up. However, energy suppliers typically buy their gas and electricity in advance, allowing them to fix some of their costs. This means that wholesale price falls are not immediately passed through to consumers. There are several prices for gas depending on when it is due to be delivered – and prices for later this year are now higher than near-term costs.
Tom Marzec-Manser, the head of gas analytics at energy consultancy ICIS, says: “Wholesale gas prices in Europe are less expensive than they were before the start of the war but Russia began reducing levels to Europe in the second half of 2021. We should be cautious of talk about gas prices reducing to normal levels because they are still exceptionally expensive.”
When will it feed through to domestic bills?
If the easing of wholesale gas prices is sustained, consumers could reap the benefits in a few months. The energy regulator for Great Britain, Ofgem, last year moved the change in its price cap from biannual to quarterly to more quickly reflect changes to volatile wholesale prices in bills. The latest period began on New Year’s Day and will run until April, when forecasters predict it could top £4,000. A reduction in wholesale prices could cut this number. The government’s energy price guarantee in effect overrides the cap, cutting average annual bills to about £2,500 until April and £3,000 for a further year after that. However, consumers are still paying more if they use more energy than normal, so if suppliers pass through falling wholesale costs then their bills should come down.
Will this cut the cost of government subsidising energy bills?
Yes, if the price falls are sustained. The government has stepped in to cover wholesale energy costs for suppliers so if those costs come down, so does the Treasury’s bill for this measure to protect consumers and businesses. The government said in November that it expected its energy price guarantee initiative to cut domestic bills to cost £25bn this financial year and a further £13bn in 2023-24.
How likely are there to be power cuts?
The other positive from falling gas prices is the lower likelihood of power cuts this winter. National Grid warned in October there was an outside possibility of three-hour rolling power cuts if cold weather combined with shortages, for example a reduction in Russian gas supply.
However, Britain averted power losses in December during a subzero cold snap without tapping several emergency measures, albeit at a cost. As gas storage has increased – rather than being depleted over the festive period – the threat of blackouts during the rest of the winter would appear to be receding.