Energy Costs Are Surging In The UK, But Never Fear, There Are Price Caps

The United Kingdom’s energy regulator is the persistent bearer of bad news these days, as it is steadily raising the price cap on residential energy bills to reflect surging energy costs.

British energy regulator Ofgem said its price cap for average household energy bills would rise by about 21% to 4,279 pounds ($5,172) a year from January to the end of March 2023.

British households are insulated from the rising energy bills for now, as the government has separately guaranteed a price cap of 2,500 pounds per year until March of 2023.

After that, the price cap rises to 3,000 pounds per year.

Imposing the price cap scheme is expected to cost the government roughly 40 billion pounds.

Analysts at Cornwall Insights forecast the latest Ofgem cap level means the total cost of the government scheme to help with energy bills is expected to reach 38-42 billion pounds over the 18 months it will be in place.

European energy prices started to rise as the world emerged from COVID-19 lockdowns and then surged in February following Russia's invasion of Ukraine.

As a result, the cost of wholesale gas has increased, and the price that suppliers need to charge per unit of energy has gone up sharply, prompting the government to step in to help consumers.

However, the cap is still only a temporary solution against the reality of natural gas prices which have been rising since early 2021, and which became even more volatile in the wake of the Russo-Ukrainian War and the sanctions placed on Russia as a result.

While natural gas prices have retreated from the highs of earlier in the summer, the current prices are still running more than double their pre-pandemic levels.

Unfortunately for British households, the UK’s price caps are merely kicking the energy can down the proverbial road. Eventually, when the government’s price cap schemes end, UK households will have to grapple with energy costs that are several times what they have been in the past. By capping energy bills to households, the UK government is only adding to the inflationary distortions of the past two years.

Shielding consumers from high energy bills now is only guaranteeing them even higher energy bills in the future. The ruptures and dislocations post-pandemic (and this includes the economic disruptions of the war in Ukraine) have made energy in the UK considerably more expensive. Government price caps and subsidies can postpone the day of reckoning on energy costs, but that day of reckoning will come for British households.