Price cap: US-Iran war set to add £155 to annual household bills from July - comment

“With many families still laden with debt from the last gas crisis caused by Russia’s invasion of Ukraine, this is more bad news for gas bills. That said, those early investments in renewables levied on bills are starting to pay off with British renewables squeezing gas power stations off the grid and so electricity prices are rising, but much more slowly than gas. 

“More investment is going to be needed if the UK is to take control of its energy, and detach from international oil and gas markets, but all the experts are clear more drilling in the North Sea won’t bring down bills which are set by global events and the actions of people like Trump and Putin. 

“There’s a surge in interest from the British public in net zero tech that doesn’t require burning oil and gas with reports of sales in solar panels, heat pumps and EVs all up. Autotrader says EVs are already cheaper to buy and much cheaper to run, and the Warm Homes Plan pledges more support, such as grants or loans, to help families to make the switch to heat pumps and solar panels.” 

A typical household will pay £155 extra because of a surge in the price of gas which has resulted from the US-Iran war. Annual gas bills are set to rise by a quarter (23%) in July, [2] and Ofgem’s price cap model shows that the vast majority of this increase is due to the gas wholesale price used in setting the price cap, which is rising by 50% [3] due to global gas supply disruption in the Middle East.  

Annual electricity bills are set to rise by 4%, with the wholesale electricity price used in the price cap rising by only 10%, driven by gas power plants, but limited by renewables pushing gas generators off the system and limiting the time gas plants set higher power prices.

Applying these wholesale price increases to Ofgem’s new, lower household demand figures, with energy use falling likely because of high prices, [4] gives an impact on bills of an extra £155 due to wholesale gas price rises, of which about £130 (82%) is on the gas bill. To put this into perspective, green levies that support older renewables are just under £40 for 12 months. That is, the extra wholesale costs due to the Iran war (thus far) will be almost four times the cost of renewables levies for a full year for a typical billpayer. 

Using higher household demand figures that Ofgem has been using until June this year, giving an extra wholesale cost of about £185, of which £155 is on the gas bill, and renewables levies of just over £40 for the year. That is, by this method, the extra wholesale costs are four-and-a-half times the total cost of green levies for 12 months.  

Ofgem notes that about 40% of household accounts (gas or electricity, separately) are on fixed tariffs, [5] so 60% will be affected by price rises in the price cap (very few are thought to be on non-fixed tariffs outside the price cap). That said, fixed price tariffs sold since the war began will have factored in rising gas prices, so those customers will already have been experiencing some of the effects. 

The current state of levies on energy bills
The Renewables Obligation (RO) and Feed-In Tariffs (FiTs) for older renewables are part of a wider set of levies, including bill support for low-income households and heavy industry, and funding the planned Sizewell C nuclear power plant. The Government recently moved part of the cost of the RO off household bills, and also ended the ECO scheme that funded energy efficiency upgrades for low-income households. [6] Renewables contracted over the past decade or so use Contracts for Difference that are accounted for amongst wholesale costs. 

The impacts on wholesale costs could be even larger over the course of the coming 12 months if prices rise further in response to the ongoing crisis and its impacts of Gulf energy facilities and global supply chains. 

Renewables are helping to protect electricity bills from gas prices. Contracts for Difference (CfDs) help to stabilise power prices by providing a fixed price to renewables, no-matter the volatility caused by gas power generation, and the next auction (AR8) will be held later this summer. [7] Renewables also limit power prices by displacing gas power plants and stopping them setting higher prices so often, with large wind farms cutting the day-ahead wholesale power price by up to a third last year, compared to if most of the wind power had instead been provided by gas power generation. [8]