In what seems to be the first test of the stewardship of the new Prime Minister Andy Burnham, energy regulator Ofgem has announced a 4% hike in its domestic price cap, a move that would see British households end up spending more on energy bills from October.
The regulator has cited the Iran war pushing up wholesale energy costs while justifying the move.
The rise, according to analysts, will undermine Burnham’s pledge to alleviate the United Kingdom’s cost-of-living pressures. The Ofgem announcement is also going to wipe out the benefits of the measures the new British PM announced last month, in which the tax got cut on electricity bills.
“High international gas prices are continuing to drive energy costs in the UK. We welcome the government’s intervention to remove VAT from electricity bills, without which customers would have faced even higher costs this winter,” said Neil Kenward, Ofgem’s director general for markets.
The increase, a 60-pound rise to 1,723 pounds (USD 2,348) from the previous cap for July to September, will hit around 22 million households on variable tariffs, with the price cap covering around 65% of customers.
Benchmark wholesale British gas prices have more than doubled since the beginning of the Iran war, as the European country, just like its global peers, is feeling the heat from the severely curbed energy trade through the Strait of Hormuz, the transit route for a fifth of the world’s liquefied natural gas (LNG).
Wholesale costs are the biggest single driver of Ofgem’s quarterly price cap, which limits what suppliers can charge households and also reflects network and policy costs.
Britain’s new Energy Secretary Miatta Fahnbulleh, reacting to the news, said consumers will be concerned about the costs of bills this winter.
“People are under huge amounts of pressure with the cost of living and energy bills. And we are absolutely alongside them. And we are trying to do everything that we can. That is why the prime minister on Day One of the job put that cut to VAT on electricity bills, which will come into effect this October. We will keep looking at what more we can do to protect families from unaffordable bills,” she remarked while speaking on BBC Radio 4’s Today program.
The removal of the VAT on electricity prevented the cap from rising by an additional 45 pounds until now. In April, the Labour government, under the leadership of the then Prime Minister Keir Starmer, also shifted some levies to cut around 150 pounds from an average bill.
With little sign of an end to the Middle East conflict, analysts forecast wholesale energy costs are likely to remain elevated and the price cap could continue to rise.
Analysts at Cornwall Insight forecast that at current wholesale prices, the cap could rise a further 9% in January 2027 to 1,872 pounds.
“Even if we saw an end to the conflict, lower stocks going into winter as demand increases mean falling bills in January (are) unlikely,” said Craig Lowrey, principal consultant at Cornwall Insight.