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 have been dropping. That means your energy company has buying gas and electricity for less. Good news—your energy bills will keep falling, right?
Possibly, 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 as much relief in their energy bills as they might hope, 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 2024 or even into 2025. Energy consumed by households today was purchased at higher rates (e.g. prices rose again in October 2023), 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 37% 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—the EPG is now not relevant or applicable.
From now until 30 June 2024, a typical direct debit household currently pays around 24.5p/kWh for electricity and 6p/kWh for gas. From 1 July, those rates will drop to 22.36p/kWh and 5.5p/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.
Market & Market Timing of Natural Gas Prices
Wholesale prices have mostly fallen in the past six months—but they are trending up a bit 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 Q3 2024 (now) is around the same as the price was in Q3 2021 (three 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 is a delay in when consumers feel energy bill relief as prices fall.
So, while the Energy Price Cap two years ago was roughly £1,200 per year and we are now seeing gas futures prices at the same level as three years ago, our energy bills are higher. Why? The £1,200 price cap three years ago reflected energy bought months earlier, at significantly cheaper prices (see the chart above). While our price cap now reflects the high natural gas prices of the past few years—that gas is still working it's way through the system.
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 | n/a |
| Oct-23 | £1,923 | n/a |
| Jan-24 | £1,928 | n/a |
| Apr-24 | £1,690 | n/a |
| July-24 | £1,568 | n/a |
Components of Energy Bills
Four years ago, wholesale costs accounted for around 35% of a typical domestic dual fuel bill. During the energy crisis, this rose to 74% (a higher percentage when wholesale prices were so high). But in Q3 2024, they are projected to account for around 37% of a typical bill, close to where we were years ago.
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 rise and 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.