UK household energy price cap to fall by £1,200 in July, analysts forecast

The UK’s household energy price cap is expected to drop by more than £1,200 in July following a sharp fall in wholesale gas and electricity prices, a move that will bring relief to the government as it tackles the cost of living crisis.

The final estimate from investment bank Investec for the price cap in July is £2,044 while it expects the level to fall to £1,933 in October.

Consultancy Cornwall Insight, meanwhile, expect the cap to fall to £2,054 in July and then £1,976 in October.

These compare with the current price cap of £3,280, and would put bills well below the £3,000 threshold from July for blanket government support.

The actual level of the cap will be announced by Ofgem, the energy regulator, on Thursday.

However, it is now too late for fluctuations in the wholesale price to affect the July cap, meaning estimates for that period are likely to be close to the mark.

Investec’s estimates on Friday are slightly lower than its previous estimates on May 3, of £2,051 in July and £2,080 in October.

The government stepped in last year to subsidise all energy bills as wholesale prices surged up to elevenfold as Russia cut gas supplies to Europe following the invasion of Ukraine.

However, the price cap is still set to be almost 60 per cent higher than pre-energy crisis levels of below £1,300, meaning many households will remain in difficulty.

“Consumer pricing will be at levels not seen since last summer, but still challenging for many,” Investec said.

The cap limits the amount energy suppliers can charge customers on default tariffs, which as of March amounted to more than 90 per cent of British households.

It is a cap on the unit rate of gas and electricity: the annual level given reflects expectations for typical households under the cap.  

It hovered between £1,104 and £1,277 between 2018, when it was introduced, and 2022, before leaping to £3,549 in October 2022 and £4,279 in January 2023 following the surge in wholesale prices.

British wholesale gas prices peaked at almost 600p per therm in August 2022, compared with the long-term average of below 50 pence per therm.

Under its energy price guarantee, the government intervened to limit typical annual bills to £2,500 from October 2022, paying suppliers the difference between that level and the price cap. The threshold for support is set to rise to £3,000 on July 1.

The total cost to the taxpayer of the price guarantee scheme, which runs until next March, was estimated in March at £29.4bn. 

Wholesale prices have fallen following a relatively mild winter and thanks to efforts in Europe to save energy and use alternative sources.

The price of gas for the third quarter of 2023 was trading at around 75p per therm this week.

Investec predicted the wholesale energy component in bills will fall from £2,223 in April to £1,030 in July.

On Thursday, gas prices in Europe fell to their lowest level since June 2021, dipping below €30 per megawatt hour, which is equivalent to about 78p per therm.