UK energy bills forecast to hit ?3,850 as Russia cuts gas supply further

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British households face being told shortly before Christmas to brace for annual energy bills of ?3,850, three times what they were paying at the start of 2022, after Russia further squeezed Europe’s gas supplies.

The forecast, which comes a day after MPs warned that millions of people would fall into “unmanageable debt” without more government help to pay bills, follows a surge in wholesale gas prices to near-record levels.

After Russia cut flows through the Nord Stream 1 pipeline, British wholesale gas for delivery this winter climbed to as high as 535p per therm, while European prices also rallied strongly.

The energy-focused management consultancy BFY said the increase meant that it now expected October’s price cap – set by the energy regulator Ofgem – to hit ?3,420 for the average dual-fuel tariff. The subsequent rise in January could mean the cap reaches ?3,850.

The cap is revised every six months but if Ofgem goes ahead with plans to shorten that period to three months, the new ceiling would take effect in January and would be announced in December, as consumers who are already wrestling with the cost-of-living crisis enter the traditionally high-spending Christmas period.

A source at one of the UK’s largest energy firms told the Guardian that its analysts believed the forecast for the price cap – which factors in what energy suppliers pay for gas on the wholesale markets – was realistic.

BFY said the average customer could end up “facing a bill of ?500 in January alone”, reflecting increased consumption during the coldest months.

Cornwall Insight, which has typically forecast the price caps with a high degree of accuracy, is expected to update its own predictions, factoring in fresh European gas price increases, early next week.

On Wednesday, runaway energy bills took centre stage in the race between Rishi Sunak and Liz Truss to be the next leader of the Conservative party and prime minister of the UK.

Sunak, who repeatedly dismissed Labour’s call to scrap the 5% VAT rate on energy bills while chancellor of the exchequer, suddenly backed the policy, in a change of heart that the Truss-supporting business secretary, Kwasi Kwarteng, called a “screeching U-turn”.

The former chancellor said axing VAT on bills would save households ?160 a year, although that would rise to nearly ?200 if BFY’s forecast of an average ?3,850 bill proves to be correct.

A spokesperson for Greenpeace said the government had done “practically nothing” to offset the energy bill crisis.

Under current proposals, unveiled by Sunak earlier this year, households will get ?400 off their bills, with the most vulnerable receiving support worth up to ?1200.

If the BFY forecast is correct, the energy price cap, which affects 22m households, would have increased by more than ?2,500 within a year, tripling from ?1,271 to ?3850 for the average dual-fuel tariff.

MPs on the business and energy committee said this week that the price cap should be replaced with a “social tariff”, with the lowest-income households paying discounted bills, funded either by taxation or by wealthier billpayers.

The gloomier prognosis for bills came in response to Russia cutting supplies of gas through pipelines to Europe, against the backdrop of a prolonged standoff over Vladimir Putin’s invasion of Ukraine.

The Kremlin-controlled gas firm Gazprom said earlier this week it would cut flows through the Nord Stream 1 pipeline to 20% of capacity, a threat it has delivered on. It blamed problems with turbines, which it said had been made worse by sanctions, imposed by the west because of the invasion of Ukraine.

Europe is scrambling to reduce reliance on Russian gas, with rationing now an option for the coming winter. While the UK sources relatively little gas from Russia compared to highly dependent countries such as Germany, European wholesale markets have a significant knock-on effect on prices paid in Britain.

As concern about the price and availability of gas mounted, data showed how reliant Europe is on gas, not just for heating in winter but also for electricity, depending on conditions.

A relatively windless day meant that gas was generating 50% of the UK’s electricity on Wednesday, with similar data reflected across Europe.

Greenpeace UK’s political campaigner, Ami McCarthy, said: “Even more wild than the astronomical price energy bills are set to reach in January, is the fact that the government’s known for ages that this was going to happen but done practically nothing to prevent it or support the millions of families that will be forced to freeze this winter.

“The real solution is reducing our energy use and ending our reliance on gas, which is now more expensive than ever.”