Decline in wholesale costs means price cap ‘predicted to fall’

A fall in wholesale energy costs is indicating the price cap will decrease from 1 October, industry analysts have said.

According to the ICIS Power Index (IPI) wholesale costs have seen a “substantial reduction”.

The price cap was introduced on 1 January this year and a new, increased cap was brought in on 1 April after Ofgem made its calculations in February.

Ofgem  raised the level of the cap to £1,254 – an increase of £117.

The price cap for pre-payment meter customers increased by £106 to £1,242 a year for the same period of a six-month “summer” price cap.

The regulator took into account underlying energy costs and as part of its methodology looked at wholesale energy prices from 1 August last year to 31 January this year, as well as a 12-month forward view of prices.

During this time the IPI values were “steadily increasing” according to ICIS, averaging £61.15/MWh.

However wholesale prices have fallen between 1 February and 31 March, with the average IPI now standing at £52.71/MWh.

A mild winter decreased consumer demand for electricity and gas, ICIS says. That, coupled with a healthy gas supply meant prices collapsed from the start of the winter.

This is not the first time analysts have predicted a decrease in the price cap following the decrease of wholesale costs.

Shortly after the new price cap level was announced in February the consultancy firm Cornwall Insight predicted that with wholesale costs beginning to decrease, the price cap is likely to fall by around £50 in the next readjustment.

This is assuming wholesale costs remain at the same level the market experienced at the end of January.

Jamie Stewart, managing editor at ICIS, said, “Fundamentals suggest that prices can continue to fall going into summer months with more liquefied natural gas (LNG) heading towards the UK particularly from the US.

“The October cap re-assessment will look at wholesale prices based on the period 1 February to 31 July 2019, which should be significantly lower.

“The new cap should reflect these lower wholesale prices – a move that would be welcomed by UK consumers.

“The flow of LNG into the UK will remain strong with British terminals expecting to receive up to seven cargoes by the end of April 2019, pushing prices down.

“In terms of electricity supply, the summer 2019 baseload wholesale electricity contract expired at a value of £43.10/MWh, according to ICIS assessments, with the summer 2018 equivalent being valued at £47.58/MWh.

“It would appear that the UK is set for a period of lower energy prices.”