Energy bills to rise for millions as impact of Iran war hits

Energy prices for households are set to increase by 13% starting in July as the wholesale costs driven by the US-Israel conflict with Iran begin to manifest in consumer bills.

Regulatory body Ofgem projects that a typical household utilizing average quantities of gas and electricity will face an additional £221 in annual expenses, raising the average yearly bill to £1,862.

This cap directly impacts millions of households on variable tariffs across England, Scotland, and Wales, with suppliers cautioning that bills could surge even further in the winter months if the hostilities persist.

Wholesale energy costs have surged ever since Iran began obstructing the Strait of Hormuz shipping route, a vital corridor through which approximately 20% of global oil and gas is transported, marking a significant response to the ongoing conflict.

The increase signals an additional £18 monthly for an average household reliant on both gas and electricity, with gas bills potentially rising by 24% and electricity bills by 5%. The standing charges, however, are reportedly stable.

The energy cap encompasses about 33 million households within England, Wales, and Scotland, while energy regulations and pricing differ in Northern Ireland.

This cap sets a maximum charge for each unit of electricity and gas for those on variable tariffs. Approximately 40% of consumers are secured under fixed tariffs and will remain unaffected until the end of their contract terms.

Ofgem defines the cap based on the estimated annual energy consumption of a "typical household," which is calculated at 11,500 kWh of gas and 2,700 kWh of electricity per year, with a single combined bill paid via direct debit.

In its recent adjustments, Ofgem has revised the "typical" energy use figures downward, reflecting broader consumer adaptations to recent high prices and improvements in energy efficiency. The newly estimated consumption levels are now 9,500 kWh for gas and 2,500 kWh for electricity annually.

This change may obscure the overall increase in energy prices, yet it does not alter the reality that consumers will be charged significantly more for energy consumption.

From July:

• The annual bill based on current consumption estimates is projected at £1,862 (an increase of £221).
• The bill based on possible revised usage estimates stands at £1,663, but under the current cap, that would equate to about £1,490, indicating that the rise would remain substantial.

Ofgem has modified these "typical domestic consumption values" previously in 2019 and again in 2023.

Energy Secretary Ed Miliband remarked, "The increase in the price cap due to an unchosen war is disheartening news for households nationwide. We recognize that many individuals were already under significant financial pressure before this crisis, which is why alleviating that burden remains our primary objective."

Winter threat

Domestic energy expenses saw a decrease of 7% between April and July, attributed to recent adjustments in governmental charges, a change announced just ahead of the conflict's escalation in Iran. However, the recommended cap for July through September reflects a sharp 25% hike in global gas prices resulting from the war, exacerbated by the effective closure of the Strait of Hormuz.

The wholesale price incurred by suppliers constitutes roughly 40% of a household's energy bill. Certain energy suppliers have forecasted that prices may rise further as we approach autumn and winter.

The government is currently formulating plans aimed at providing targeted aid to those most affected, should high energy costs persist through the colder months when energy consumption typically increases.

Presently, a typical household incurs costs roughly £600 higher compared to pre-2022-23 price shocks, albeit the recent increases are less severe than those experienced during the aforementioned crisis, largely spurred by Russia's invasion of Ukraine.

A substantial amount of unpaid debts exists toward energy suppliers, with a significant number of individuals with disabilities utilizing heightened energy levels year-round for essential medical equipment.

Energy usage by household type

Costs fluctuate based on energy consumption levels correlated with the new household energy usage estimates taking effect in July:

• Low usage (flat or one-bedroom home): approximately £1,172 annually, based on around 6,000 kWh of gas and 1,600 kWh of electricity for one to two residents.
• Medium usage (two to three-bedroom home): roughly £1,664 annually, based on 9,500 kWh of gas and 2,500 kWh of electricity for two to three individuals.
• High usage (four-plus bedroom home): around £2,333 annually, based on 14,000 kWh of gas and 3,800 kWh of electricity for four to five residents.

Ofgem's chief executive, Tim Jarvis, stated, "We recognize that many will express concerns regarding rising prices. Although energy use typically subsides during summer months, households can still undertake practical measures to manage costs, such as examining fixed tariffs or altering their payment methods."

Experts have indicated that countless households have implemented measures to reduce energy use, including lowering radiator settings, shortening shower durations, sealing draughts, and selectively maintaining heating in specific rooms to curb costs.

Preparations established during a warm summer to revisit these habits and advance home energy efficiency may prove beneficial as prices are anticipated to escalate once more.

Julie Clague, a proactive individual in managing her heating expenses, employs an electric blanket and refrains from heating her entire home, stating, "I don't always heat the home; I heat the person."

At 59, she has recently qualified for free solar panels based on her location and income, leading to optimistic thoughts about upcoming winters. "Last winter was bitterly cold, so I'm genuinely looking forward to a more comfortable winter with the solar panels helping me produce energy to stay warm."

This system was implemented through the community organization YES Energy Solutions in collaboration with the city council.

Even in the absence of eligibility for grants for larger projects, small habit changes can significantly assist in cost reduction, according to CEO Duncan McCombie, who provides a kit containing tools to facilitate temperature management and insulation improvement.

"People may feel they have already made adjustments but may be capable of more," he remarked.

Energy UK, representing suppliers, has emphasized that energy expenses continue to remain unaffordable for many households.

"This serves as yet another unwelcome reminder—occurring too soon after the previous one—of how our nation's considerable dependence on gas exposes us to unavoidable price fluctuations arising from distant conflicts," commented Ned Hammond, deputy director of customer policy at Energy UK.

He added that companies have been offering struggling customers payment plans and temporary payment reprieves as part of various support initiatives.