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Tumbling gas prices on track to slash £60bn cost of energy bailout

gas storage europe
gas storage europe

Britain's energy bills freeze could prove much less costly than feared by early next year, as City forecasters predict that gas prices will plunge this winter following a successful scramble across Europe to fill reserves.

A halving in gas prices in the coming months would push average household bills below the £2,500 limit set by the Government’s Energy Price Guarantee, slashing the cost of the intervention, according to estimates by Deutsche Bank.

The Chancellor said on Friday that the overall cost of supporting households and businesses for the next six months could be £60bn. However, wholesale gas prices have plunged from record highs in recent weeks after promises of more intervention on energy in Europe and successful efforts to fill storage before the winter.

Some forecasters have predicted prices will drop much further and benchmark European and UK natural gas prices have fallen for four consecutive weeks with gas storage on the Continent almost 90pc full.

Deutsche UK economist Sanjay Raja said that current prices imply household energy bills being close to an average £5,000 if the price cap was still being used to set costs.

However, if prices across Europe did halve this winter as expected by some forecasters, it would push UK bills to £2,500, below the cap set by the Government’s Energy Price Guarantee.

He said: “Then it would be the cost of suspending the green levy only, as the Ofgem Price Cap would have sunk to just around £2,500.

“At £150 per household [the green levy suspension] would cost the Chancellor something like £4.2bn per annum.”

The guarantee was predicted to cost as much as £150bn when it was announced but the final blow to the Exchequer will depend on the direction of wholesale gas prices this winter.

Goldman Sachs has projected that prices in Europe will fall from above €200 per megawatt hour earlier this month to below €100 by the first quarter of 2023 after the storage boost. UK gas prices closely track those in Europe and have dropped by more than 50pc since the record peak in August.

Cutting the cost of the energy bills support would be a major boost to the Exchequer as markets baulk at the huge borrowing planned by the Chancellor.

UK Government borrowing costs soared by the most on record on Friday after Mr Kwarteng pledged to ramp up bond sales to pay for tax cuts. Plans to sell an extra £72bn of gilts to fund the mini-Budget sent the benchmark 10-year gilt yield soaring to 3.8pc on Friday, levels not seen in more than a decade.