Energy bills could surge to £2,500 a year thanks to Iran conflict – should you fix now?

Rising conflict in the Middle East is causing chaos in commodity markets and raising concerns that households could bear the brunt of rising energy prices.

Gas prices have risen in Europe and the UK in recent days as Qatar’s state-run energy utility, which accounts for a fifth of liquefied natural gas (LNG) trade, halted production.

Experts have warned that a continued rise in gas prices will undo the recently announced energy price cap cut, with some predicting a possible increase in average annual household energy bills of up to £2,500.

The energy price cap is set at £1,641 for the average home from 1 April, but is expected to change again in July. If it rises to £2,500, as suggested by analysts at Stifel, there will be a 52 per cent increase.

This marks the highest level of energy bills since Russia’s invasion of Ukraine, which caused gas prices to rise.

> Best energy deals: Fixed tariffs Exceeding the price cap

How do gas prices affect our energy bills?

Households have become acutely aware in recent years that conflicts can lead to price increases and leave them struggling to pay their bills.

Although gasoline prices are not yet at the level of the 2022 crisis, there is concern that the longer the current conflict lasts, the more difficult the situation will be for consumers.

The UK is increasingly reliant on LNG imports from Qatar, now the world’s second largest supplier of gas after the US.

Wholesale gas prices in the UK rose as much as 45 per cent on Monday and rose a further 25 per cent this morning to over 150 pence per therm, the highest level since January 2023.

Meanwhile, European gas prices extended their rise by a further 40 percent to €60/MWh, after rising nearly 35 percent on Monday.

Simon Francis, co-ordinator of the End Fuel Poverty Coalition, says the rise in gas prices means higher energy costs ‘as the UK remains heavily reliant on gas and the developed North Sea basin will not be able to meet domestic demand over the next few years.’

Gas customers are not the only ones affected by rising prices.

Francis adds: ‘Our energy system also links the cost of gas to electricity prices because the grid is still dependent on gas-fired power stations, although this impact has decreased over the past year.’

What does the price cap mean?

In the short term, households are protected from rising wholesale prices whether they sign a fixed or variable agreement.

While fixed-deal households will continue to pay current unit rates, standard variable-deal households are protected by the energy price cap set by Ofgem, which will drop by more than £100 from April.

From next month, the typical dual-fuel household will pay £1,641 for their energy, and the price cap will be maintained until July, when it changes again.

The impact on households will be minimal if the conflict in the Middle East is resolved relatively quickly, but if gas prices continue to rise it could reach the price cap by the summer.

This is because Ofgem uses average prices and other relevant costs over a three-month observation window.

Francis says: ‘The bills are effectively protected until at least July 1, 2026 because the April-June limit has already been established.

‘The emission cap works by moderating price increases and delaying the transmission of cost increases to consumers. But this also means the real risk is what happens next.

‘If wholesale prices fall the impact may be limited.

‘However, if high prices continue, this will affect Ofgem’s next price ceiling decision in May, which will be effective from July.’

Richard Neudegg, director of regulation at comparison site Uswitch, says: ‘If we see wholesale prices being persistently high next term, Ofgem will need to reflect this and this could have a knock-on effect on the July price cap level.’

Stifel analysts say a tripling of European wholesale gas prices to €100 could push the typical bill up to £2,500 a year and risk a ‘repeat of 2022’ unless the conflict eases.

Currently EDF predicts the price cap will rise by £65 to £1,706 between April and July following increases in wholesale prices.

But he warned: ‘It is still a long time before the next cap period is approved and so our forecast is quite uncertain at this point.’

This will become an even bigger problem if the disruption to Qatar’s exports extends into the colder months and Europe is forced to compete with Asian buyers.

Bridget Payne, head of energy forecasting at Oxford Economics, says this will “prolong the impact by hampering Europe’s ability to refill gas tanks before winter”.

Spike: Gas price increased this week due to conflict

Is it a good idea to fix it now?

Regulator Ofgem is urging households to fix their energy bills even before the conflict in the Middle East began.

Suppliers offer significant discounts on the ceiling price; so if wholesale prices rise over a long period of time, reaching a deal will save you money in the long run.

There is no doubt that major suppliers’ fixed deals will be repositioned as we explore where energy prices might move.

No major suppliers have withdrawn or changed their deals, but this could change quickly.

In times of uncertainty, Francis warns, ‘they often pull deals or increase their prices to avoid exposure to variable wholesale costs.’

Uswitch’s Neudegg advises households that do not currently have a fixed tariff to now consider switching to a fixed tariff.

‘Affordable fixed deals are currently available for an average of £74 below next April’s price cap.

‘Those who switch after the government’s energy bill cuts take effect from April 1 will receive further reductions in their unit rates.’

The best power purchase deals at the moment include Outfox the Market, which costs £1,509 per year, Fuse Energy, which costs £1,515, and Eon Next, which costs £1,543.

Compare the best fixed energy deals in the box below.