Experts predict that energy prices and monthly expenses will decrease by the end of 2023.

Since the beginning of 2021, the average home’s gas and electricity costs have skyrocketed to £2,500 per year. Without government assistance, this number would be even greater.

The wholesale price of energy has decreased from nearly £6 per therm (a unit of heat) in August of last year to less than £1 today.

Why are energy costs so expensive?

The amount we pay for energy is proportional to wholesale gas and electricity prices – the amount that energy suppliers pay to the companies that generate energy.

This wholesale price has increased significantly since the pandemic, initially due to the gradual return of household behaviour to pre-pandemic norms and an increase in energy demand. Six months before the summer of 2021, petrol prices had increased by more than 50 per cent.

Demand increased further as the autumn and winter months progressed, resulting in a steeper price increase. In February 2022, when Russia invaded Ukraine, wholesale prices had already quadrupled annually. The war reduced the amount of petroleum from Russia, driving up prices until August last year.

The limit does not protect fixed rates.

In October 2020, this limit was 18 pence per kilowatt-hour for electricity and 3 pence per kilowatt-hour for gas, or £1,042 per year for the average household. By April 2022, the quota had risen to 28 pence per kilowatt-hour for electricity and 7 pence per kilowatt-hour for gas, or £1,971 per year for the average household.

As energy prices continued to increase, the energy price limit was anticipated to increase to an annual average of over £3,500. The government enacted the “energy price guarantee” to protect households from this, which limits the average bill to £2,500: 33.21p per kWh for electricity and 10.02p per kWh for gas.

Effectively, you pay the lower energy price limit or the energy price guarantee, with the government covering the difference if energy companies lose money. The average household’s energy price guarantee will increase to £3,000 annually on July 1.

As energy prices decrease, the price cap will probably be lower than this, and households will return to paying the price cap.

When will the cost of petrol and electricity decline?

Although it is excellent news that wholesale prices are decreasing, this will not necessarily result in lower household bills, at least not immediately.

Due in part to the government’s energy price guarantee, we have been shielded from the high wholesale petrol price. From October to December last year, the Ofgem energy price limit for the average household was £3,549. This year, it was £4,279 per year from January to March and is now £3,280 per year from April to June.

However, this was not reflected in our invoices because the energy price guarantee capped annual costs for the average household at £2,500. As prices decline and the energy price cap descends below the energy price guarantee, we will continue to pay the same amount for energy. 

It will reflect the true cost of energy rather than a subsidy

Our bills will also be affected by how suppliers purchase energy. Most businesses “hedge” by purchasing their required energy in advance, protecting themselves from price fluctuations.

It indicates that the price we pay to our energy supplier is not directly impacted by the wholesale cost of energy that week or month, and there will be a lag between a decrease in wholesale prices and a decrease in household expenses.

Tom Faulkner, an analyst at Cornwall Insight, stated that wholesale prices were still historically high and that it was unlikely that demand (and consequently prices) would fall as low as they did during the pandemic.

What will the cost of energy be moving forward?

The energy price cap for July through September has not yet been released, but Cornwall Insight predicts that the average household’s annual bills will decrease to £2,063. This forecast is based on the prices of 29.50 pence per kWh for electricity and 7.50 pence per kWh for gas.

From October to December, the average annual cost will be £2,098 or 30.6p per kWh for electricity and 7.53p per kWh for gas. It predicts an average annual charge of £2,163 from January to March, with electricity costing 31.5p per kWh and gas costing 7.86p per kWh.

Remember that this is what the average household that uses an average quantity of energy will pay, and your actual cost will depend on how much energy you use.

The energy price limit also only applies to variable tariffs

Before energy prices skyrocketed, most households were on fixed agreements, where the price per kWh for electricity and gas was fixed for a set period. As energy prices rose, suppliers withdrew these deals from the market (or they became so costly that it made more sense to remain on a variable deal protected by a price restriction).

As energy prices decline, suppliers may offer competitively priced fixed agreements again. Once this occurs, increased competition among suppliers may decrease prices.

“We do know that while energy costs may begin to balance off, they are still a long way from pre-2020 levels. While consumers may feel more secure, we must recognize that these costs remain unaffordable for many households, according to Cornwall Insight’s Craig Lowery.

“Only by reducing our reliance on imported energy can we gain confidence that our bills will remain stable over the long term.”