February 4, 2023

UK households face average annual energy bills rising above £5,000 next year, according to the latest forecast, which will put further pressure on the government to intervene to alleviate the rising cost of living.

The warning from consultancy Auxilione follows a sharp rise in UK wholesale gas prices this week and comes as ministers meet with power generators in Downing Street on Thursday morning. Discussions will focus on how to respond to the impact of rising wholesale energy prices, mainly caused by Russian gas pressures on supplies to Europe.

The price cap, which regulates gas and electricity bills for the vast majority of British households, has already risen from £1,277 to £1,971 this year. Earlier this week, another forecast suggested it would hit 4420 pounds in April, more than three times the level at the start of 2022.

Auxilione said it expected regulator Ofgem to set the price cap at “just over £3,600” when it announces the results of its next review, now held every three months, on August 26. That increase was set to take effect in October before the ceiling was expected to exceed £5,000 in the first half of 2023, the consultancy added.

Earlier this week, Cornwall Insight predicted that the ceiling would reach £4,420 in the spring, but wholesale gas and electricity prices have risen further in recent days.

The Auxilione forecast follows warnings of a severe drought affecting shipments of coal and other raw materials on Germany’s Rhine, a major artery supplying power plants. Norway has also indicated that it will limit the export of electricity.

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Gas prices have skyrocketed as Russia has curbed deliveries to Europe, in a move European politicians have labeled a “weapon” of gas supplies following the large-scale invasion of Ukraine.

Rising energy bills have become a key issue in the ruling Conservative party’s leadership election, which will appoint a new prime minister to replace Boris Johnson in early September.

Rising inflation and concerns that skyrocketing energy prices will plunge the economy in general into a deep recession as households cut spending have led to calls for more aggressive government intervention, from additional financial support to overhauling the way electricity markets work.

The prospect of a windfall tax on electricity producers, some of whom have made huge profits from renewables and nuclear generation, has resurfaced.

Chancellor Nadhim Zahawi has kept alive the prospect of hitting producers with an additional tax bill if they don’t invest their profits in renewable energy schemes, although other options are on the table.

Business and energy secretary Kwasi Kwarteng – who is widely tipped as the next chancellor if leader Liz Truss becomes prime minister – is looking at options to decouple electricity prices from gas generation.

Companies such as EDF, Centrica, Drax and RWE are present at the meeting with Kwarteng and Zahawi.

Former Chancellor Rishi Sunak, who is up against Truss, has accused his rival of being sluggish with deep household concerns and the need for additional financial support. He has pledged to expand the £15bn bailout package he announced in May. At the time, the bills were expected to be around £2,800 in October.

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Truss has said she prefers tax cuts to “handouts,” but has left the door open for additional support. She said on Wednesday it was “important” to work with energy companies to lower prices.

Auxilione said there seemed to be “little appreciation” from the government “for how impossible” it would be to lower prices. “Energy companies and government have little control over this in such a globally impacted market,” it added.

Ofgem has warned against price cap forecasts given the volatility of energy prices.