Households in the UK are bracing for potentially higher energy bills this winter as wholesale natural gas prices reach three-year highs. European nations are actively working to replenish their natural gas reserves ahead of the colder months, a move that is driving up costs.
The European benchmark natural gas price surpassed €75 per megawatt-hour on Wednesday, marking its highest point since late 2022. Similarly, UK natural gas prices this week exceeded 185 pence per therm, also a level not seen since the latter part of 2022. Analysts attribute the recent price jump, in part, to renewed hostilities between the United States and Iran, with concerns that the conflict could prolong the closure of the vital Strait of Hormuz, through which approximately one-fifth of the world's oil and liquefied natural gas (LNG) is transported.
Hamad Hussain, a senior climate and commodities economist at Capital Economics, indicated that the reopening of the Strait of Hormuz might not occur until early 2027, with a subsequent delay before energy flows normalize and prices stabilize. Hussain warned that "the risks to gas prices are definitely tilted towards the upside," forecasting that gas prices could exceed €80 by the end of the year. He noted that gas storage operators had initially anticipated a three to four-month resolution to the crisis, but the situation has persisted for about six months.
These elevated wholesale gas prices directly impact household energy bills through the regulator Ofgem's price cap. The cap increased in July and is set to rise by an additional 4% in October, bringing the typical household's annual cost to £1,723. Energy consultancy Cornwall Insight forecasts a potential further increase of 9% in domestic energy prices in the new year, which could heighten concerns for consumers during the winter.
Dr. Craig Lowrey, a principal consultant at Cornwall Insight, stated that a continued rise in wholesale prices would "increase pressure on our January price cap forecast." However, he also noted that a decrease in wholesale prices could alleviate this pressure.
The UK government's Department for Energy Security and Net Zero (Desnz) has stated that gas prices are influenced by international markets and has addressed criticism regarding the UK's low storage levels. Centrica, the owner of British Gas, has advocated for government support to expand the Rough storage facility in the North Sea, warning of its potential closure next year without a viable plan.
Ángel Talavera, chief European economist at Oxford Economics, described the situation as having "a glass half full, and a glass half empty" outlook. While current wholesale gas prices are lower than during the period following Russia's invasion of Ukraine, households and businesses are still expected to face higher energy bills than usual. Talavera characterized the situation as "serious, but not catastrophic," adding that significant changes would be required for prices to decrease substantially.
The overall energy outlook is influenced by several factors, including the global shift towards renewables, which is reducing overall demand for natural gas. However, the severity of the upcoming winter weather remains a critical variable. A warmer-than-average winter could reduce demand and ease price pressures, while a colder winter would likely drive up demand and prices.
Concerns about winter weather also extend to the potential impact of the developing El Niño phenomenon, which has historically coincided with both unusually cold and unseasonably warm winters in the UK. Talavera suggested that gas prices could fall if weather patterns reduce demand and the Strait of Hormuz reopens sooner than anticipated, but currently, "the weather machine remains our main hope."