Household energy bills in Britain could rise by as much as 25 per cent in January, according to analysis by Bloomberg Economics, as wholesale gas prices surge following the outbreak of war in Iran.
European energy prices have climbed sharply since the conflict began in late February, disrupting oil and gas supplies from the Persian Gulf. UK month-ahead gas futures have jumped 150 per cent since the war started, a rise expected to push up the energy price cap set by regulator Ofgem in January.
An average household already faces a 4 per cent increase in annual energy bills to £1,723 from October. Bills are now expected to rise by a further £427 to around £2,150 in the new year, pushing costs close to the £2,500 cap introduced after Russia's invasion of Ukraine in 2022, when the government stepped in to subsidise the difference so households only paid the capped amount.
Bloomberg Economics found that the rise in energy bills looks set to coincide with UK inflation climbing to 4 per cent, double the Bank of England's 2 per cent target.
Labour is understood to be considering measures to support households with rising energy costs, including extending the £150 Warm Home Discount to people who do not currently qualify for it.
Differing price cap forecasts
Several energy suppliers have published their own forecasts. EOn predicts the price cap for January 2027, due to be announced towards the end of November, will be more than £300 higher than now, reaching £2,027. The cap for a typical household paying by direct debit currently stands at £1,663 a year.
From October, prices for millions of households will rise to their highest level in three years under Ofgem's cap. In August, Ofgem said the cap would increase by 4 per cent from October 1 for households on standard variable tariffs, citing higher wholesale gas prices linked to the war in the Middle East. That amounts to £60 a year more for a household using a typical amount of gas and electricity, though more than a third of households are on fixed tariffs and will not be affected.
EOn expects the real increase to land in January, forecasting a jump of nearly 18 per cent from October's cap, which would take a typical bill from £1,723 to £2,027 a year. Separately, Ovo Energy has forecast the January cap could reach £2,041, a rise of £318 on the October figure.
No figures have been confirmed officially. The predicted increases come as households also contend with rising mortgage rates and higher supermarket prices. Cornwall Insight, an energy consultancy, said it would not publish its next price cap forecast until the end of this month.
'Gas prices at a three-year high'
Dr Craig Lowrey, principal consultant at Cornwall Insight, told This is Money: "Renewed tension in the Middle East has pushed gas prices to a three-year high."
"Rising wholesale prices will inevitably increase pressure on our January price cap forecast, but we're only a few weeks into a calculation period that runs for three months, so there's plenty of time still to go," he said.
"A short burst of high prices won't move the cap much on its own, but the longer prices stay raised, the more that movement becomes embedded in our view of the cap," he added. "Even if wholesale prices were to ease back from where they are now, gas storage across Europe is running low, and that combination makes higher prices in January increasingly likely."
What the cap means for bills
Joe Lytwyn, a personal finance expert at thimbl, said an estimated 18 per cent rise in the price cap would represent a significant additional cost for households, particularly because it would arrive in January when energy use is typically at its highest.
"Averaged across a year, that is roughly another £25 a month, although households tend to use considerably more energy during the colder winter months," he said. "Wholesale markets can move quickly, and the final figure will depend on market conditions and the other costs Ofgem includes when it sets the cap."
The energy price cap is not a maximum household bill. It limits the amount suppliers can charge per unit of energy and through standing charges, so what a household actually pays still depends on how much gas and electricity it uses.
Millions on fixed tariffs
Around 35 per cent of households, or 11 million, are on fixed energy tariffs, which can beat standard variable rates. But roughly 22 million households across England, Wales and Scotland are on tariffs affected by the price cap.
Amid the turmoil in the Middle East and higher wholesale prices, locking in a fixed-rate tariff may help households beat the cap, though experts advise checking exit fees, a supplier's reputation and contract length before switching.
Outfox Energy currently offers an 18-month dual fuel fixed rate deal priced 0.8 per cent below the current price cap. Sainsbury's Energy's Fix and Reward deal, fixed for 24 months, costs £1,686, which is £23 above July's price cap but £37 below October's.
Wider economic pressure
As the economic mood darkens, households face what has been described as a "triple whammy" of surging gas and electricity prices, rising mortgage rates and another round of tax increases.
UK borrowing costs reached a 28-year peak last week as the prospect of more government debt, higher spending, elevated inflation and rising interest rates rattled bond markets. The surge in gilt yields came as oil prices jumped more than 5 per cent to a four-month high above $107 a barrel last week, with crude rising more than 10 per cent over the week and petrol prices reaching a four-year peak. Official figures from the Office for National Statistics show gas prices have climbed 128 per cent over the past year, the highest level since December 2022.
Brent crude was trading 3.3 per cent higher at around $108 a barrel, after surging 8.6 per cent to close last week at $104.61. The overnight rise followed new strikes on Saudi Arabian and Iranian ships in the Gulf, as well as the shutdown of Saudi Arabia's East-West oil pipeline.
Industry experts have warned Energy Secretary Miatta Fahnbulleh that household gas and electricity bills are about to surge. Ed Miliband, as energy secretary, had previously promised to cut bills by £300 by the end of the parliament.
With food prices also rising, the looming inflation could force the Bank of England to raise interest rates from their current level of 3.75 per cent. Chancellor John Healey has refused to rule out further tax rises in next month's Budget as the government struggles to fund Labour's spending plans and service its debt.
Government borrowing costs rose further last week, with the yield on 30-year gilts coming within a whisker of 6 per cent for the first time since 1998. Bank of England Governor Andrew Bailey has warned that the cost of UK home loans has risen faster than in any other G7 country, "with the possible exception of Japan", because of the war in Iran. All of the major high street lenders announced mortgage rate rises this week, with brokers warning that turmoil in the bond market will trigger further increases.
The original "winter of discontent" took place under Prime Minister James Callaghan's Labour government in the 1970s, when a global energy price surge and widespread strikes were worsened by extreme cold weather.
