Burnham’s £45 electricity bill cut set to be wiped out by soaring gas prices

A surge in gas prices fuelled by the resumption of the Iran war will cancel out any household savings provided by Andy Burnham’s promise this week to remove VAT from electricity bills, experts have warned. The wholesale price for gas in Europe has surged by nearly 50 per cent in the past month after the outbreak of fresh hostilities between Washington and Tehran coincided with concerns over winter supplies and increased demand for gas-produced electricity during the summer heat. Earlier this week, the Prime Minister put a pledge to reduce the VAT on domestic electricity bills from five per cent to zero at the centre of a campaign to offer voters immediate and tangible help with the cost of living. Shorts According to Treasury figures, the reduction, which comes into force in October but is currently only funded until next April, will save households £45 a year if made permanent. It is £45 more than if the Government did not intervene, but experts warn that volatility in international gas markets means a likely rise in domestic energy bills will wipe out the saving. VAT cut ‘to be wiped out by price surge’ UK wholesale gas prices rose by three per cent alone this week to 151p per therm – meaning they are now higher than the peak reached in March during the initial phase of the Iran war. Cornwall Insights, an energy market think-tank, said consumers are now facing a two per cent increase in bills when the energy price cap for October is announced at the end of next month by watchdog Ofgem – adding that the saving from the VAT cut “looks likely to be wiped out by rising wholesale costs”. The consultancy said: “While the Government’s VAT removal will ease electricity costs, unfortunately overall bills will not be falling and households are still looking at an approximate two per cent rise on the current price cap, largely driven by increased unrest in the Middle East pushing up wholesale costs.” Julian Jessop, an independent economist and a fellow at the Institute of Economic Affairs, underlined that without a cut in VAT, energy bills would be even higher. He added: “The fact that bills are going up at all will undermine confidence – including in the new Government.” Majority of UK households still reliant on gas for heating The vast majority of UK households – about 85 per cent – use a mixture of gas and electricity to power and heat their homes. Consequently, even if electricity prices fall, homeowners are still vulnerable to an increase in their total bill if gas costs rise significantly. The Ofgem price cap, which calculates the annual energy bill for the average household, currently stands at £1,862, meaning households are looking at an annual rise of about £37 in October. According to the Institute for Fiscal Studies, the fact that the VAT cut is due to end next April means it will be worth only about £25 for its current seven-month duration. Rupert Harrison, a former senior Treasury official and a senior adviser to investment house PIMCO, said a jump in domestic bills will reflect any sustained rise in gas wholesale prices. He told BBC News: “If you think about the announcement we had this week about VAT on domestic fuel taking about £45 a year off the average bill, that will have already been more than outweighed now by these price moves. So this will feed through.” Warning over winter gas reserves Volatility in gas prices follows increased demand from both Europe and Asia for gas-produced electricity to power air conditioning units and growing concern about gas stocks in Europe ahead of winter. The summer months are normally used to replenish gas reserves at a time of lower demand. But gas storage in Europe currently stands at about 53 per cent of capacity – some 15 points lower than the five-year average for this time of year. Storage in Germany, which is almost entirely reliant on imports for its gas supplies, is currently only about 45 per cent full. In the meantime, increased competition from Asia for liquefied natural gas (LNG) shipments means less of the commodity is arriving in Europe. According to one monitoring company, France will receive just 13 LNG cargoes this month – the lowest figure for five years. The UK is highly unlikely to suffer a domestic supply shortage because it still derives the majority of its supply from British and Norwegian fields in the North Sea, as well as LNG shipments. ‘It is a vulnerable situation’ But consumers could nonetheless be vulnerable to sudden cost spikes if Europe is unable to adequately replenish its stocks and a cold winter drives up international prices with high short-term demand. Norway’s Equinor, which is Europe’s biggest gas supplier, warned this week of the possibility of sharp price swings if winter storage targets are not met. Torgrim Reitan, the company’s chief financial officer, told Bloomberg: “It is a vulnerable situation. We are very uncertain about how we will enter the winter.” Environmental experts said the volatility was further proof of the long-term need for the UK to reduce its reliance on gas. Daniel Lewis, an energy expert at innovation charity Nesta, said: “What is clear is that the UK is still at the mercy of volatile international gas markets and the Government will need to take action for households to reduce their reliance on gas this winter and in the long term, such as by taking more legacy policy costs off electricity bills and abolishing the standing charge on gas.”