Why are wholesale gas prices falling and will they lower UK bills? | Gas

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Economic forecasters could be forgiven for reading projections for 2023 with their fingers as strikes, cost-of-living pressures and a possible global recession paint a bleak picture. But wholesale gas prices offered little optimism, with a sharp decline in recent days. Here’s why it’s declining — and what it means for consumers.

How much did the prices go down?

European rates for February delivery fell 4.3% to €73.7 a megawatt-hour on Tuesday, well below rates of more than €300 an hour last fall. This is also below levels seen before the Russian invasion of Ukraine, which drove already exorbitant prices even higher.

What leads to lower wholesale gas prices?

The recent mild weather in the UK and Europe and the likelihood of this continuing over the next couple of weeks is the most compelling factor. These mild conditions have reduced heating demand, complementing efforts by households and businesses to cut energy use — and bills.

Energy market traders have also been encouraged by European countries’ efforts to fill gas storage facilities – particularly with LNG 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 the coming winter.

Will this drop in wholesale prices lead to lower household bills?

Ultimately, yes, if the fall continues and other factors – like a sudden bout of cold weather – don’t push prices up again. However, energy suppliers usually buy gas and electricity up front, which allows them to set some of their costs. This means that lower wholesale prices are not immediately passed on to consumers. There are many gas prices depending on when it’s delivered – and gas prices later this year are now higher than near-term costs.

“Wholesale gas prices in Europe are less expensive than they were before the war began, but Russia has begun to lower levels to Europe in the second half of 2021,” says Tom Marzyk-Manser, head of gas analytics at international consultancy ICIS. Gas prices have fallen to normal levels because they are still exceptionally expensive.”

European gas prices are still exceptionally expensive due to less supply from Russia. When will domestic billing come in?

If wholesale gas prices continue to ease, consumers could reap the benefits within a few months. Great Britain’s energy regulator, Ofgem, last year moved the change in its price cap from semi-annual to quarterly to reflect changes to volatile wholesale rates in billings more quickly. The latest period began on New Year’s Day and will run until April, when forecasters expect it to top £4,000. Reducing wholesale prices can lower this number. The government’s energy price guarantee actually exceeds the cap, reducing average annual bills to around £2,500 until April and £3,000 for another year after that. However, consumers still pay more if they use more energy than usual, so if suppliers experience falling wholesale costs, their bills should go down.

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Privacy Notice: Newsletters may contain information about charities, online advertisements, and content funded by third parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and the Google Privacy Policy and Terms of Service apply. Will this reduce the cost of government subsidies for energy bills?

Yes, if prices continue to fall. The government has stepped in to cover wholesale energy costs to suppliers, so if those costs fall, the Treasury bills for the measure to protect consumers and businesses. The government said in November that it expected its energy price guarantee initiative to reduce domestic bills to cost £25bn this financial year and another £13bn in 2023-24.

How likely is the power outage?

The other positive factor from lower gas prices is the reduced possibility of power outages this winter. The National Grid warned in October that there was an outward possibility of a three-hour blackout if cold weather combined with shortages, for example a drop in Russian gas supplies.

However, Britain avoided energy losses in December during a severe cold snap without resorting to many emergency measures, albeit at a cost. With gas storage increasing – rather than being depleted during the holidays – the risk of power outages during the rest of the winter appears to be receding.

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