For his next economic miracle, Rishi Sunak will restore energy bills to their pre-crisis level. Well, no, he obviously won’t make such a rash promise because, as everybody knows, some things lie beyond the control of the UK government. International energy prices, which are still the biggest determinant of the cost of energy for households, plainly fall in that camp.
It is a point to remember as Sunak and his chancellor, Jeremy Hunt, seek credit for meeting their “pledge” to halve inflation this year. October’s reading of 4.6% qualifies as victory but the work has been done primarily by higher interest rates, which are the Bank of England’s job, and falling energy prices.
Sunak, in pledge mode at the start of this year, made an informed analysis of which way the wind would blow in 2023 and has been proved correct, but that is very different from engineering the outcome. At best, government has helped the fight against inflation by resisting flashy fiscal giveaways but, given the state of public finances, it did not have much choice.
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To put the energy price fall in context, a year ago the regulator, Ofgem, was announcing a price cap of £4,279 per dual fuel household – a horrendous figure compared with, say, £1,138 in the Covid times of February 2021.
The £4,000-plus figure was, of course, theoretical for households because they were protected by the government’s energy price guarantee of £2,500. But it was illustrative of the scale of the whack to businesses’s energy bills, which feeds into the prices of goods or services. With the cap now at £1,834, the benefit – and therefore the effect on inflation numbers that measure year-on-year changes – has clearly been substantial.
So the next chapter for energy prices matters – and, sadly, nobody is forecasting a return to the good old days of rounded-down average bills of £1,000. Think instead of £2,000-ish.
Here is the prediction of the consultancy Cornwall Insight for the quarterly price caps for 2024, based on forward-looking market prices and the smoothing factor in Ofgem’s formula: £1,923; £1,929; £1,880; and £1,917. In other words, the price cap is forecast to be slightly above the current level throughout 2024.
Cornwall’s forecasts a fortnight ago were, note, a sharp increase on what it was expecting as recently as September, which illustrates how quickly prices can move and how the UK is exposed to events elsewhere. The Israel-Hamas war, for instance, caused halts in production at Israeli gas fields, which meant lower gas output to Egyptian processing plants for liquified natural gas (LNG); a Finnish gas pipeline in the Baltic Sea has been damaged; and Australian LNG exports have been hit by industrial disputes.
“The Russian invasion of Ukraine demonstrated there is a delicate balance in the global energy market which can easily be disrupted by unexpected events, [and] it looks as though the current situation is repeating that pattern,” said Craig Lowrey, Cornwall’s principal consultant.
Nobody will complain about a halving of inflation or evidence that the UK is less of an international outlier in the “stickiness” stakes than feared. But let’s be clear about what this supposed triumph means for household energy bills. Market prices suggest the average household will be paying about £600 less a year than the government-assisted £2,500 ceiling, but the number will still be about £800 higher than what we used to regard as normal. That may not feel like an out-and-out triumph on the ground.
