Wholesale energy prices are falling: When will I start paying less for gas and electricity?
The good news is that energy prices in the wholesale market are dropping. That means your energy company is buying gas and electricity for less right now. Good news—your energy bills must fall soon, right?
Yes, but not as much as you might expect. We'll explain why.
Why Falling Energy Prices Won't Help You, Yet
There are a few reasons why households haven't seen much relief in their energy bills just yet despite falling wholesale prices:
- Energy Price Guarantee: The Energy Price Guarantee (EPG) means consumers have been paying less than they should right now, with the government essentially subsidising the difference. As energy gets cheaper, it'll first be the government who pays less in subsidies then, if prices drop enough, consumers will see cheaper bills. That's now starting to happen, luckily.
- Timing of energy purchases: Energy suppliers typically buy their energy ahead of time so energy bought today at lower prices won't reach the market for use until late in 2023 or even into 2024. Energy consumed by households today was purchased at higher rates, e.g. during 2022 when prices were skyrocketing, and is therefore sold to consumers now at a higher cost to reflect the higher raw material cost.
- Wholesale costs are just part of your bill: Right now, wholesale costs account for around 74% of a typical domestic dual fuel bill. Many of the other costs are somewhat fixed from year to year. So your bill will not drop as quickly as wholesale costs.
We'll try to explain why these factors will minimise or delay the impact of falling wholesale prices on your household energy bill.
Energy Price Guarantee (EPG)
Due to the government’s Energy Price Guarantee (EPG), UK households were paying less than they should be for energy. For example, the price cap was technically £3,280 until 30 June 2023, but households were protected under the EPG, which limited the charges for a typical household to £2,500—a savings of around £780 per year.
Therefore, without the EPG support, the typical household would have paid around £780 more per year for energy right earlier this year.
Luckily, prices have now fallen below the EPG. From now until 30 September, a typical direct debit household currently pays around 30p/kWh for electricity and 8p/kWh for gas. From 1 October, those rates will drop to 27p/kWh and 7p/kWh for electricity and gas, respectively.
So, who wins as wholesale prices fall? While the EPG was in effect, it was the government, and by extension taxpayers, who first felt the benefit as rates fell, since they were essentially subsidising household energy bills. Once rates fell below EPG levels (in July 2023), cheaper wholesale rates were felt by consumers.
Note: it's just been announced that the new Energy Price Cap (EPC) is £1,923 from 1 October 2023, which means that the EPC will be the limiting factor, not the EPG—and that consumers can expect their energy rates to fall another 7% from 1 October!
Market & Market Timing of Natural Gas Prices
Wholesale prices are falling—but they have not yet fallen enough AND it takes months for wholesale prices to work their way through to consumers.
This is because energy companies buy energy months and months in advance. As a result, there is always a delay between market moves and the prices that consumers pay (or changes in the Energy Price Cap).
If we assume it takes 6-9 months for wholesale prices to work their way through the system and reach household bills, then could we pay less for our energy consumption later this year? How much less?
Looking at the chart below, you can see historical (in yellow) and expected future (in purple) natural gas prices. You'll notice that the price for Q4 2023 (now) is around the same as the price was in Q3 2021 (two years ago, just as Russia started reducing gas supplies to the EU market ahead of their invasion of Ukraine).
But you'll also see that the energy price cap rose in a delayed manner, that is, after the wholesale prices increased. So prices didn't go up for consumers as quickly as the wholesale market rose. By the same token, there will be a delay in when consumers feel energy bill relief as prices fall.
So, while the Energy Price Cap back in Q3 2021 was roughly £1,200 per year and we are now seeing gas futures prices at the same level as we did in Q3 2021, it does NOT mean our energy bills might soon fall by half to around the same level at the £1,200 price cap from Q3 2021. Why? The Q3 2021 £1,200 price cap reflected energy bought months earlier, at significantly cheaper prices (see the chart above). While our price cap now reflects the high prices of 2022/23.
For your information, here is the history of the Energy Price Cap and Energy Price Guarantee for the past few years:
| History | Energy Price Cap | Energy Price Guarantee |
|---|---|---|
| Jan-19 | £1,137 | n/a |
| Apr-19 | £1,254 | n/a |
| Oct-19 | £1,179 | n/a |
| Apr-20 | £1,162 | n/a |
| Oct-20 | £1,042 | n/a |
| Apr-21 | £1,138 | n/a |
| Oct-21 | £1,277 | n/a |
| Apr-22 | £1,971 | n/a |
| Oct-22 | £3,549 | £2,500 |
| Jan-23 | £4,279 | £2,500 |
| Apr-23 | £3,280 | £2,500 |
| Jul-23 | £2,074 | £3,000 |
| Oct-23 | £1,923 | £3,000 |
Components of Energy Bills
Back 2020, the most recent data available, wholesale costs accounted for around 35% of a typical domestic dual fuel bill. In the January to March 2023 time period, they are projected to account for around 74% of a typical bill (it's a higher percentage now since wholesale prices have risen so much).
But since wholesale costs only account for a portion of the household energy bill, not the entire bill, and the other costs are somewhat fixed, household bills will fall less that wholesale prices. That is, if wholesale prices fall x%, household energy bills would fall y%, where y is less than x.
This is another reason that you won't feel the full effect of plummeting wholesale natural gas costs.
While it's certainly better that wholesale prices are coming down, the government subsidies are still needed to help protect household finances, and may be for some time according to market predictions.