The price cap offers protection for households through to the end of June, but thereafter the government should look to climate and clean energy policy for economic stability, competitiveness and resilience, writes Bev Cornaby, Director of the Corporate Leaders Group UK.
First published in BusinessGreen
After five years of sharp rises, at the end of February, the UK government gave a brief glimmer of hope for household energy bills. The escalating conflict in the Gulf region presents a challenge to whether these reductions can be maintained, but if the government is to keep its promises on improving the cost of living, they must be proactive in trying to do so.
The government yesterday confirmed that regardless of events in the Middle East, the next price cap will fall by seven per cent from 1 April 2026, as had been announced by Ofgem, the energy regulator, late last month. The price cap - the maximum amount energy suppliers can charge consumers on default tariffs for each unit of energy and standing charge - will therefore provide protection to billpayers until the end of June. This positive news for people's pockets, part of the government's commitment to deliver on improving the cost of living, could result in millions of households saving an average of £150.
However, with the escalation of fighting between the US, Israel and Iran and its spillover, it is not clear whether this reduction can be maintained beyond June. The wholesale oil and gas prices have already risen sharply, as commercial shipping through the Strait of Hormuz is disrupted. Qatar has shut down LNG liquefaction removing a significant share of global supply. Even if the conflict stops now, this could take weeks to ramp back up to the same levels.
These higher wholesale prices are already feeding through to higher costs for households and businesses with warnings on energy bills, renewed inflationary pressure and reduced scope for interest rate cuts. It underlines how tightly energy security, economic stability and market confidence are linked. And how global conflict can impact affordability.
One of the most immediate effects has been on the price of fuel at the petrol pump. In just the first few days of the conflict, prices went up by 3p per litre for petrol and 5p per litre for diesel. With predictions being realised that the price of oil would rise further (from $85 to over $100 per barrel – last month the price was $63 a barrel), these rises in fuel prices could multiply quickly, which could lead to increased fuel costs of hundreds of pounds a year – potentially cancelling out the anticipated savings on household energy bills.
However, for those who have made the switch to an electric vehicle (EV) already, they may not experience the same shocks. By contrast, they may experience greater savings on their investment, further strengthening the case for the clean energy transition. Research by ECIU shows that while EVs already result in savings of up to £870 per year compared to filling up with petrol, this could increase to more than £1,000 if the price of oil continues to rise. Additionally, with the price cap on household energy bills, those who charge their car at home between April and June, will be further shielded from potential increased prices at the pump.
This is not the only area where the case for the clean energy transition is strengthened. Going down this route provides a structural route to resilience. Scaling renewable electricity generation and transmission generation and investing in flexibility, storage and resilience grids, alongside reducing fossil fuel dependency are not only climate-aligned actions, they are also economic risk management tools. And it is these tools that businesses need government to deploy to also protect them from price shocks.
Even before the government's announcement and the escalating conflict, warnings were being issued that action is needed urgently to address high energy costs for business…. The case for action is even more stark now. UK businesses already face some of the highest electricity bills in the developed world, impacting the UK's global competitiveness. Their exposure to global gas prices leaves them open to price volatility, something we are likely to see play out in the coming weeks. While, businesses fixed price deals, may be protected for now, those just coming out of contract, or no in contract, will be vulnerable to sharp price rises.
The question is: what can the government do to minimise the impact of this volatility both on consumers and businesses?
For consumers, one immediate option for the government could be to remove remaining levies from electricity bills. One study shows that in taking this step, households could experience savings of between £170 and £530. For businesses, government may need to deploy energy bill support mechanisms. While immediately, these could focus on directly reducing energy bills through subsidies and compensation, as current schemes do, more comprehensive mechanisms that deliver more permanent fixes, could focus on improving energy efficiency and reducing reliance on fossil fuels. Additionally, building systems based on local renewable electricity and low operating costs are structurally less exposed to global volatility.
In protecting households and businesses from energy price volatility, approaching climate action as a foundation of economic stability, competitiveness and resilience, allows the UK to align energy security and design resilience into systems. This is what the government sought to do through its mission to be a "clean energy superpower", and while the current context makes it challenging, maintaining focus on investing in clean, secure, UK generated power is key to delivering affordable energy long term.