UK Energy Price Cap Rises 13% as Iran War Drives Up Costs

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(Bloomberg) — UK households will see the biggest increase in energy bills since 2023 as the war in Iran drives up wholesale gas and power costs, adding to broader inflationary pressures weighing on the economy.

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The energy price cap, the maximum amount suppliers can charge households, will rise 13% to £1,862 ($2,505) from July 1, Ofgem said in a statement on Wednesday. Because the cap is updated quarterly, the previous level was set using market data from before the conflict escalated, making this the first increase to fully reflect the recent turmoil in the Middle East.

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European energy markets have surged since the Iran war began earlier this year, amid fears over disruptions to oil and gas shipments through the Strait of Hormuz, a key route for energy exports from the Persian Gulf. In the UK, month-ahead gas futures have climbed more than 40% since the conflict started, while the equivalent power contract has risen by almost a third.

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The increase is unusual for the time of year when demand usually declines. The price cap is updated every three months and typically falls during the summer as wholesale power prices ease. But energy consultant Cornwall Insight Ltd. expects bills to rise again in October, warning that even a swift end to the conflict would be unlikely to bring prices back to April’s levels because of damage to infrastructure and the lasting impact of disrupted energy supplies.

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“A summer rise will be painful for households, but the bigger concern is October, when household demand traditionally picks up,” said Dr. Craig Lowrey, principal consultant at Cornwall Insight.

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The jump in energy costs has transformed the inflation outlook facing the Bank of England, evoking painful memories of the shock following Russia’s invasion of Ukraine.

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Prior to the war, the UK central bank had expected inflation to ease toward its 2% target over the spring, allowing it cut interest rates further this year. Now, it projects price growth will pick up to almost double its target later this year even under its less pessimistic scenarios. Higher motor fuel costs for drivers already kept UK inflation elevated at 2.8% in April.

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The upward move has forced the BOE to shelve its planned rate cuts with several officials recently warning they are considering increasing borrowing costs as the war drags on. They are weighing up whether a weak labor market and subdued economy can offset the threat of another feedback loop in prices caused by higher energy costs.

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The government is drawing up plans to offer targeted support to ease household energy bills later in the year. Last week Chancellor of the Exchequer Rachel Reeves said the government stands ready to act “if market conditions worsen significantly” and that she’s leading on efforts to develop a new temporary support system. Reeves has already ruled out a universal energy bailout like that delivered by the previous Conservative government in 2022.

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Even though the price cap had been falling in recent months, household energy debt continued to climb. Before the conflict, industry body Energy UK estimated arrears could reach £7 billion by the end of 2026.

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While the government is considering measures to address the growing debt burden, which is ultimately spread across consumer bills, EDF said it was “disappointing” that efforts to tackle the issue had faced repeated delays and a dilution of their potential impact.

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—With assistance from Jessica Shankleman.

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