UK households are facing the prospect of higher energy bills this winter as European nations struggle to replenish natural gas reserves ahead of the colder months. Wholesale gas prices have climbed to their highest levels since late 2022, a period marked by the fallout from Russia’s invasion of Ukraine.
On Wednesday, the European benchmark for natural gas reached over €75/MWh, while UK prices surpassed 185p per therm. These surges are largely attributed to renewed hostilities between the US and Iran, which have kept the Strait of Hormuz effectively closed. As a vital artery for global energy, the waterway typically handles approximately one-fifth of the world’s oil and liquefied natural gas (LNG) supply.
Hamad Hussain, a senior climate and commodities economist at Capital Economics, does not anticipate the waterway reopening until early 2027. Even if the passage were to reopen, he noted that a significant lag would occur before energy flows normalize and price pressures subside. “The risks to gas prices are definitely tilted towards the upside,” Hussain stated, projecting that prices could exceed €80 by the end of the year. He observed that while many operators initially expected the crisis to resolve within months, the strait has now been effectively blocked for roughly half a year.
These wholesale price hikes directly influence the energy price cap set by the regulator, Ofgem. Although the cap increased in July and is set for another 4% rise in October—bringing the typical household bill to £1,723—analysts at Cornwall Insight warn of a potential further 9% increase in the new year. Dr. Craig Lowrey, a principal consultant at the firm, noted that current wholesale trends are placing significant pressure on their January forecasts, though he acknowledged that a shift in market conditions could still provide relief.
The Department for Energy Security and Net Zero (DESNZ) maintains that gas prices are dictated by international markets. Addressing concerns over the UK’s limited storage capacity, the department stated it remains open to proposals for new storage sites, provided they offer value for taxpayers. Meanwhile, Centrica boss Chris O’Shea has urged the government to support the expansion of the Rough storage facility in the North Sea, warning that without intervention, the site may close next year. The government has pointed to Prime Minister Andy Burnham’s pledge to reduce VAT on energy bills and broader efforts to decrease national reliance on natural gas.
Economic analysts suggest the outlook remains finely balanced. Ángel Talavera, chief European economist at Oxford Economics, described the situation as “serious, but not catastrophic.” While current prices remain below the peaks seen during the initial stages of the Ukraine conflict, households will still face higher costs than usual. Talavera emphasized that the ultimate impact on demand will depend heavily on winter weather patterns.
The influence of the El Niño weather phenomenon remains uncertain. While the 2009-10 “Big Freeze” coincided with an El Niño, the 2006-07 winter saw similar conditions result in unseasonably warm temperatures. Currently, the market is heavily reliant on weather-driven demand reduction, as a warmer-than-average winter could alleviate some of the pressure on supply.
Financial markets are also reflecting these broader economic tensions. Following a sharp rise earlier in the week, the yield on 10-year UK government bonds—or gilts—fell slightly on Thursday to hover around 5.15%. Despite this minor dip, the yield remains at a level not seen since 2008, underscoring the volatility currently affecting the national economy. The report also notes that europe, which delayed its summer stockpiling due to high wholesale costs sparked by the Iran war, had been gambling the conflict would end before winter and prices would in turn fall. The report also notes that we are about six months into the strait being effectively closed and that obviously has not happened,” he added. The report also notes that however, he cautioned that there was “plenty of time to go” and a fall in wholesale prices could ease the pressure. The report also notes that it’s serious, but not catastrophic,” he told, adding “something would have to dramatically change to lower prices”. The report also notes that it is not known how the developing El Niño over the Pacific Ocean will impact Britain’s winter. The report also notes that but, at the moment, “the weather machine remains our main hope”.
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