Britain’s energy price cap falls: will prices follow?

As of 1st July, the energy price cap in Great Britain has fallen to £2,074. Does this mean that prices, after a difficult period of increases, are finally heading firmly on a downward path? What can we expect in the near- and long-term future?

What is happening with energy prices?

As we’re all aware, the cost of energy has risen dramatically over the past two years. In England, Scotland and Wales, this has been controlled by what is known as the energy price cap. Calculated by Ofgem, this is the maximum level at which suppliers can set their tariffs for each kilowatt hour of energy a consumer uses.

However, energy suppliers’ tariffs may be regulated, but the cap doesn’t limit the charges of energy producers. This has meant that margins have been tighter even for suppliers, seeing many smaller companies enter administration in 2022.

It also meant that the price cap would have to have risen to an unsustainably high level for consumers – and so the government also introduced the energy price guarantee (EPG). This held consumer bills at no more than £2,500 for typical usage up to April 2023 and then £3,000 from June onwards for two years by subsidising the extra costs between the EPG and the energy price cap.

Note that it doesn’t actually mean you can’t pay more than £2,500 – the actual cut-off point of both the energy price guarantee and cap is on price per kWh and standing charges, but it’s usually expressed as if it were a house of 2-3 people using 12,000kWh of gas and 2,900kWh of electricity yearly.

At any point where the energy price guarantee fell below the energy price cap, then that lower price would be the one that applies.

This is what has fortunately now happened from 1st July. In April, the energy price cap had risen to £3,280, with prices for consumers held at no higher than £2,500 for typical usage under the energy price guarantee.

In July, however, the energy price cap fell to £2,074, making it lower than the guarantee – and potentially saving households the equivalent of hundreds annually compared to previous rates.

How much will energy bills come down in July?

As we said above, the energy price cap is expressed based on typical usage, so bills might not follow the exact pattern. There are also a few extra costs, including VAT at 5% and some differences in billing prices, such as if you pay by direct debit or upon receipt of a bill, with the latter being about 6-8% higher.

If your supplier hasn’t sent you an estimate, you can do your costs by taking your average kWh usage for gas and electricity and adding the new cap for daily standing charges, using these figures:

• Electricity: £0.3 per kWh; £0.53 daily standing charge
• Gas: £0.08 per kWh; £0.29 daily standing charge

What has caused prices to drop?

The consumer price can be immediately traced back to the fall in wholesale energy prices, which has been happening for some time but has only slowly filtered through to consumers. This has been helped somewhat too by lower demand in the Northern Hemisphere over the summer months. Likewise, Europe has higher levels of gas storage, whereas previously, storage levels were low and the continent as a whole was very reliant on Russian energy.

Are energy prices likely to continue falling?

This is where the optimism dims somewhat. It’s impossible to properly predict what will happen, but some energy stakeholders have expressed doubts over a smooth fall from here on. The International Energy Agency has warned that in the case of a harsh winter with consequent increasing demand, prices could rise – particularly if the Chinese economy strengthens. If China is able to buy a lot of energy from the markets, then Europe could find itself paying high prices to satisfy demand once again.

In the same vein, energy consultancy Cornwall Insight predicts that typical costs will fall again to £1,878.31 in October 2023 and then rise again to £1,1916.76 in January 2024, followed by another fall to £1,888.11 in April 2024.

It’s also important to remember that while energy prices took a hit following the Russian invasion of Ukraine, that wasn’t the start of the energy crisis. Prices had already risen rapidly following the Covid-19 pandemic and as demand began to rise faster than supply.

So, while we don’t know for sure where the energy markets and energy price cap are going, it does look like recovery will be a somewhat bumpy road for the time being.

What do changes in energy prices mean for the currency markets?

Now, the price that we pay for our energy consumption may not appear to impact the FX markets at first glance. However, they do have a significant influence on the economy – which itself impacts currencies.

Firstly, high energy prices can reduce consumer confidence and consumer spending as people tighten their belts. This is normally a barometer that investors will take as signifying less certainty in a country’s economy and, therefore, its currency (in this case, the pound). However, in times of high inflation, the response can be somewhat more muddled, as less consumer spending and therefore a drop in demand may help to tame price rises.

Secondly, high energy prices can have a devastating impact on businesses, large and small. While businesses can also get government help through the Energy Bills Discount Scheme, costs are far higher than for residential consumers. If businesses are held back or even face closure due to energy costs – something which certain sectors like hospitality are particularly sensitive to – then it can have a knock-on effect throughout the economy, on job losses, spending and growth. Again, this is something that can make investors wary about treating a particular currency as a safe place for their capital.

If you do have exposure to the international currency markets, then it pays to be informed. Read up on our blog about how wider price inflation impacts the cost of living and the markets, and make sure that you sign up for daily or weekly market news from our experts.