Price cap predicted to rise to almost £1,660

Ofgem’s price cap on energy tariffs is on track to rise to £1,659 in April in next year due to continued increases in wholesale gas and electricity prices, Cornwall Insight has predicted.

This would represent an increase of £382 – or 35 per cent – on the current level of £1,227 which came into effect at the beginning of October.

Cornwall Insight also forecast that the effects of the increase in wholesale costs and the resulting supplier failures would persist beyond the following summer, with the price cap rising once more to £1,663 in October next year.

“With wholesale gas and electricity prices continuing to reach new records, successive supplier exits during September 2021 and a new level for the default tariff cap (£1,277 for a typical dual fuel direct debit customer) for winter 2021/22, the GB energy market remains on edge for fresh volatility and further consolidation,” explained senior consultant Craig Lowrey.

Lowrey said it remains unclear to what extent the recovery of the costs of supplier failures from the rest of the industry will impact the price cap: “Despite the record levels seen in the wholesale market which are contributing to the forecast increases in the default tariff cap, additional costs resulting from the succession of supplier exits risk contributing to even higher costs – these being charges under the Supplier of Last Resort (SoLR) scheme and industry support schemes for which the former suppliers were liable.

“Although the price cap methodology is structured to accommodate both outcomes, the extent to which they will be relied upon means that the impact on all consumers – not just domestic ones – could be felt into 2023.”

Under the SoLR mechanism, companies taking on the customers of a failed supplier can make a claim to Ofgem to recover any additional costs above those it expects to recoup from transferred customers, including any outstanding credit balances. These costs are then recovered through distribution network charges.

Lowrey said: “Due to the speed and frequency of exits under the SoLR process, details of the relevant administrator’s proposals – which would normally be expected to contain details of credit balances and other financial liabilities – have not yet been published.

“However, we note that use of the SoLR process since January 2018 has resulted in eight claims totalling approximately £56 million, with several acquiring suppliers using the scheme to recover a proportion of customer credit balances.

“Therefore, with supplier exits since the start of August already into double figures, the prospect of further claims – and additional costs for consumers – is apparent, although when these costs will reach bills is unclear.”

The unpaid bills of failed suppliers under the Renewables Obligation and Feed-in Tariff schemes can likewise be recovered from the rest of the industry through mutualisation processes.

Given the uncertainty over how much money will be recovered and when, Cornwall said its forecasts for the price cap exclude these costs, meaning they are likely to be conservative estimates.

“While they have historically been comparatively small amounts in terms of their impacts on bills, the extent and frequency of the supplier exits risks pushing the normal approach of cost recovery into uncharted territory and having unknown impacts on an already stressed retail supply sector,” said Lowrey.

Cornwall’s forecasts are based on data collected up until Monday (4 October). But Ben Samuel, editor for European spot gas market at price reporting firm ICIS, said there has been no let up in the gas price increases so far this week: “There’s been a lot of volatility in the market and we’re seeing fresh highs broken each day.”

“We are now in what is defined as winter, which is Q4 and Q1, so obviously everybody’s nervous,” he told Utility Week. “Demand tends to go up and this time of year although it’s still relatively early for people to be switching their heating on.

“But this all comes against a backdrop of very, very empty gas storage. Across Europe, you’ve got sites about 70 per cent full. If we look at the 2016 to 2020 average, it’s normally about 80 per cent at this time of year so quite a big deficit in terms of storage.

“If you look across Northern Europe – so the UK, the Netherlands and Germany as well – the situation is even more acute. In the UK, we have relatively low storage capacity so it’s a bit of a non-factor but if we look at countries where we might import from like the Netherlands, storage is even emptier there. Something like 60 per cent.”

He continued: “If we look at the supply situation into Europe, there’s been a lot of volatility in terms of pipeline supply into Germany in particular, and for this month, if we just look at the amount of capacity booked – Russian pipeline capacity into Europe – it’s quite a bit down on where we were last month.”

“This really goes back to a trend in August where there were some upstream issues in Russia but I think people weren’t anticipating quite as big a drop into Germany this month as what we’ve seen.”

There have also been suggestions that Russia may be limiting gas supplies to Europe to put pressure on German regulators to approve the controversial new Nord Stream 2 pipeline connecting Germany and Russia directly through the Baltic Sea. The pipeline, which is owned by a subsidiary of Gazprom, began being filled with gas earlier this week.

The project has faced opposition from both the EU and the US due concerns that the pipeline may be used by Russia to exert political leverage.

“The other factor as well is we’ve had not very much LNG coming into Europe throughout the summer,” said Samuel.

“We’re starting to see a little bit more LNG coming into the market this month but the key story here is prices have been extremely high in Asia. We’ve seen a lot of demand, especially in China, for LNG cargoes and that has just meant that any increase in terms of European prices has been more than matched in Asia so we’ve seen Europe priced out of the LNG market.”

“On top of that, there’s been a drought in Brazil which has limited hydro production there, so again, Brazil has been upping its prices for LNG because they’ve needed gas to compensate for the shortfall.”

ICIS’ National Balancing Point (NBP) price indices for within-day and month-ahead gas contracts hit new record highs on Tuesday (5 October) of 256p and 294p per therm respectively. The latter represents a nearly ten-fold increase on the price at the same time last year.

Speaking to Utility Week before it collated its price indices for the day, Samuel said the company had also seen individual within-day and month-ahead trades at 360p and 343p on Wednesday – both of which are also new records. He said prices had eased off since the morning after an adviser to the EU Court of Justice reportedly stated that Gazprom’s Nord Stream 2 subsidiary can challenge an EU rule requiring that gas producers must be separate from the operators of pipelines.