The only way is down? Assessing the impact of falls in wholesale energy prices on household and public finances
7 February 2023
Huge rises in energy prices through much of 2022 sparked a cost of living crisis with recession-level hits to family (as inflation soared) and public finances (as the state partially protected us from bill rises). But there has finally been some good news with wholesale gas prices for 2023-24 down more than 70 per cent from their peak in August. So, while the extreme volatility in energy markets over the past year means that the outlook is still very uncertain, in this Spotlight we look at what the big fall in energy prices might mean for household and government finances. There is good news for households who benefit from smaller-than-feared rises in energy costs if prices remain at current levels. Typical annual energy bills are now forecast to be £2,400 next year (2023-24), down from the forecast of £3,000 at the time of the Autumn Budget (the level of the 2023-24 EPG). But 2023-24 will still feel difficult. The first thing families will notice is a rise in energy bills in April, as Government support is reduced and the Energy Price Guarantee (EPG) is raised to £3,000 (from £2,500), and overall, energy bills are set to be 20 per cent (or £400) higher in 2023-24 than in 2022-23. Falling gas prices are not a panacea for families already struggling with the high cost of living. The public finances will benefit from lower wholesale energy prices more swiftly. Based on current futures prices, the cost of the EPG in 2023-24 is estimated to be around 90 per cent below the Office for Budget Responsibility’s costing made in November (£1.5 billion compared with £12.8 billion). Lower energy prices, however, also mean lower receipts from windfall taxes. These are highly uncertain, but a back-of-the-envelope calculation suggests revenues could be as much as £7 billion lower. Nonetheless, the fall in energy prices is likely to materially reduce borrowing once the lower cost of support for firms and the smaller hit to household incomes than feared are considered. Overall, lower energy prices – if sustained – should provide a much-needed economic boost. And while the outlook is still a very difficult one for living standards, some of the pressure on household and government finances have been reduced.