The latest surge in gas and electricity prices could see the price cap on default tariffs rise to well over £3,000 in October, according to analysis by Investec.
The warning came as front-month gas prices spiked by around a third on Thursday morning (24 February) after Russia launched an invasion into Ukraine.
“The jump in electricity and gas prices of recent days has sent our October tariff cap estimate soaring above £3,000,” said Investec senior analyst Martin Young.
“Granted this assumes no change in prices over the remainder of the observation window, but absent sharp and significant declines in wholesale prices, we expect a significant jump in the cap in October.”
Investec specifically estimated a figure of £3,238 – a 64% increase over the new price cap level of £1,971 for the six-month period beginning in April. The firm said earlier this month that the price cap was on track to rise to £2,448 in October.
“This could be devastating for UK households with elevated fuel poverty, and an ‘eat or heat’ dilemma. The political crisis will intensify, and government will need go further than current measures, and be more targeted,” said Young.
He continued: “With this direction of travel, measures put forward by the government, of which the repayable £200 rebate on electricity bills is little more than a poorly disguised loan, are insufficient in quantum, and most definitely fall short of addressing distributional fairness.
“Energy is likely to intensify as a political crisis for the government. We suggest that a return to the drawing board is necessary to ensure support is there for those that need it, and if this means tough decisions for the chancellor then these decisions must be made.
“Higher tariffs are also likely to see bad debt risks increase for suppliers and, to the extent that suppliers are unhedged, the sharp jump in wholesale prices could be a solvency risk for some.”
Earlier this month, Ofgem announced it was pressing ahead with plans to modify licence conditions to enable in-period adjustments to the price cap. Young said although the latest developments could meet some of the regulator’s proposed criteria for in-period adjustments, “it is not clear that all five tests would be satisfied.”
Investec price cap estimate
Speaking to Utility Week on Thursday afternoon, ICIS gas and LNG analyst Alex Froley said the firm’s intraday assessment of front-month NBP gas prices was 280 pence per therm – a roughly 30% increase on Wednesday’s closing price of around 215 pence. He said the price had hit as much as 320 pence per therm on Thursday afternoon.
Froley noted that there had not actually been any reduction in gas flows to Western Europe through pipelines from Russia: “In fact, supplies of Russian gas to western Europe via Ukraine actually increased from earlier in the week. We believe this is because the higher spot prices made it more attractive for western European buyers to increase their requests for long-term contract gas from Russia.”
He said 58 million cubic metres were booked to flow through Ukraine on Thursday – around double the level seen earlier in the week.
Froley continued: “We did not see any immediate impact in the LNG market either, with tanker shipments to Europe continuing as normal. Clearly the situation has the potentially to change rapidly, so a lot of uncertainty remains. If pipeline flows were to see major disruptions prices would increase further and the market would see much larger changes.”
EnAppSys director Paul Verrill said there had also been a significant knock impact on power markets on Thursday, with baseload power prices for February rising from around £200/MWh to £250/MWh and prices for March increasing from £215/MWh to £250/MWh.
Although the UK imports relatively little gas directly from Russia, it is the largest source of imports into the closely connected European market. Russia accounted for 41% of gas imports to the EU in 2019.
Verrill said if European politicians decided to restrict these imports, some this volume might still be received “essentially by proxy” as Russia increased flows to countries such as China, displacing LNG shipments that could instead by redirected to Europe.
Nevertheless, Verrill said the consequences of such a decision would be huge, noting: “The price we’re seeing now is unprecedented and there isn’t a massive mismatch between supply and demand.”
“If you were in Europe and you made that decision, or even if you contemplated making that decision, I think you’d probably have to do lots of other things as well.”
He said European countries would have more options due to a more diverse mix of energy sources. Germany, for example, still has a significant amount of coal generation operating.
“In the UK, those coal generation plants have been winding down to close in 2024 and so they don’t have massive coal stocks because what would they do with it.”
He said payments might need to be made to coal generators to ramp back up so gas supplies could be preserved for heating over the remainder of the winter season.