With winter not yet over and the heating season still in full swing, the timing of Monday’s energy market crisis could hardly be worse for UK households. The dramatic surge in gas prices — up 40% in a single trading session — raises the prospect of higher domestic energy bills at precisely the moment when many families are already stretching budgets to cover heating costs. The question for households is how soon and how severely the market disruption will translate into their monthly bills.
The good news, such as it is, is that there is typically a significant lag between wholesale gas price movements and retail energy tariffs. Suppliers purchase gas on forward markets and under long-term contracts, meaning that a single day’s dramatic price spike does not immediately translate into higher bills. Households on fixed-term energy contracts have additional protection, with their prices locked for the duration of their contract period.
The bad news is that the underlying supply disruption that drove Monday’s price spike is likely to persist for some time. With Qatar’s LNG production offline and the Strait of Hormuz effectively closed, the conditions that sent prices soaring are not going to be resolved in a matter of days. If prices remain elevated at their new levels for weeks or months, the effect on forward market pricing — and ultimately on retail tariffs — becomes progressively more significant.
Households whose energy contracts come up for renewal in the coming months face the most direct exposure to higher prices. New contracts written at the elevated wholesale prices prevailing now will carry the full weight of the market disruption. For households on variable tariffs, the protection is more limited still. Energy suppliers are permitted to raise variable tariff prices with relatively short notice when wholesale costs rise significantly.
The government will face pressure to consider interventions if prices rise significantly. The precedent of energy bill support measures implemented during previous crises provides a policy framework, but such interventions are costly and create their own economic distortions. For the time being, households can do little more than monitor the situation, reduce energy consumption where possible, and prepare for the possibility that bills may rise in the months ahead.