UK day-ahead power prices have hit record levels in recent days amid a crunch in natural gas supply. Experts say high prices are likely to continue through the winter as demand increases but supply constraints remain.
“If pricing holds steady through to the end of January, we could see another hefty price bump in energy retail prices,” Sanjay Raja, an economist at Deutsche Bank, wrote in a recent investment note. “As of right now, our models point to a near 16% m-o-m rise in gas, and 14% m-o-m rise in electricity tariffs kicking in from April ‘22.”
Ofgem reviews the energy market every six months to set price caps based on wholesale energy prices and inflation. In August, the regulator announced a huge £139 increase in the price cap, blaming record gas prices. The increase will take effect from next month and will hit 15 million people in the UK.
Ofgem blamed the price hike on soaring wholesale costs for gas but natural gas prices have only risen further since Ofgem’s summer review. The rises have put large swathes of the retail energy market in the black and prompted emergency talks with the government over state support. The situation means bills are almost certain to rise at the next review.
“Customers will feel this and it will filter through into bills if this continues,” Henry Edwardes-Evans, an energy analyst at S&P Global Platts, said.
Several smaller energy companies have gone bust after locking in customers on fixed rate tariffs that were no longer sustainable at current energy prices. Utility Point and People’s Energy both went under last week and Edwardes-Evans said more were likely to fail in the coming months, although big operators like British Gas should be fine.
Arran Train, general manager of Energy24, said gas prices were spiking because of “a number of factors”, such as an unusually long winter, low supplies across Europe, and a fire that knocked out a power line between France and the UK.
“As things stand, there are a lot of uncertainties on each of these factors so it is unclear what the longer term impacts might be,” he said.