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Falling gas prices could take bills below £3,000 a year, says Ofgem

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Energy bills could fall below £3,000 a year within months but are likely to remain high and volatile, requiring continued subsidies for vulnerable households, the regulator has said.

Jonathan Brearley, Ofgem’s chief executive, said that the recent drop in gas prices would feed through to lower bills than feared, which could “possibly” result in typical annual bills falling below the government’s £3,000-a-year energy price guarantee as soon as April. This would be three months earlier than analysts had forecast and could save billions of pounds in subsidies.

He added, however, that wholesale prices were still three times higher than historical levels and were “unlikely to go back to the levels we saw pre-pandemic”, when bills were about £1,200 a year. “We must continue to be vigilant and ready for a world where prices are high and are volatile,” he said.

He recommended that the government urgently consider the introduction of a “social tariff” that would give vulnerable households permanent protection from high prices. This could potentially be subsidised through general taxation, he said, adding that it would not be progressive to fund this from other consumers’ energy bills.

The intervention yesterday came as National Grid extended the use of its emergency measures to bolster Britain’s electricity supplies for a second day, as the cold weather led to continued high demand for power. Households and businesses taking part in its new “demand flexibility service” will be paid to use less electricity between 4.30pm and 6pm tonight after the scheme was used for the first time between 5pm and 6pm last night.

More than £2 million is expected to be paid out under the scheme tonight, most going to participating consumers. Their suppliers will retain a share in profit to cover their costs.

Octopus Energy, which signed up the most users to the scheme, said that more than 400,000 of its customers had opted in for last night’s event, when it was offering rewards worth £3.37 for every kilowatt-hour of electricity they avoided using. It has raised that to £4 per kilowatt-hour tonight after securing higher prices from National Grid.

In trials a typical household has saved about half a kilowatt-hour, which would be worth a couple of pounds tonight. Those with high normal energy use, however, such as those with electric vehicles, have been able to cut down much more, earning £10 to £20.

Last night National Grid also instructed three emergency backup coal-fired power plant units to be warmed, ready for potential use: two at Drax in North Yorkshire and one at West Burton in Nottinghamshire. It had ordered them to be warmed up on Sunday for potential use yesterday but cancelled that early yesterday after the outlook for supplies improved.

The company decides whether to run the demand flexibility scheme a day in advance and says that it will not cancel if the outlook improves. Analysts said the electricity system appeared fairly well supplied last night, even without the use of the scheme.

National Grid said it had activated the schemes again “as part of cautious measures to ensure we continue to have adequate operational reserves. The use of these additional services is not an indication that electricity supplies are at risk but that we require greater options.” It declined to give further detail about why it was using the plans now, when the margins between forecast supply and demand appeared healthier than previously this winter.

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