Plummeting global gas prices have slashed the cost of the UK’s energy price cap and may ultimately reduce the monthly subsidy to zero, greatly alleviating the strain on Government borrowing.
NatWest Markets estimates that the price guarantee would cost approximately £30bn over the first six months based on current futures contracts, half the £60bn figure assumed by the Treasury and the rating agencies.
“Markets are currently signalling that the cost of the Energy Price Guarantee may be much lower than budgeted,” say authors Joann Spadigan and Imogen Bachra.
The spot price of wholesale gas in Europe is even lower than December futures. If it remains at today’s level, it will fall below the strike price where the state subsidy kicks in. This would eliminate the burden for the Exchequer “entirely”.
While NatWest remains wary of gilts after the mini-budget and the bond shock last month, it said pessimism over the UK’s public finances may have gone too far. Gilts may no longer be a one-way bet for traders.
The energy market is complex, with time-lag effects and opaque contracts. Some of the gas shock is already baked into the pie. A few deliveries may be based on futures contracts signed over the summer when prices were more than twice today’s level.
Gas Infrastructure Europe says gas stocks have reached 98pc in France, 94pc in Germany, and 92pc in Italy. This is enough to muddle through the winter so long as there is no polar vortex.
The Government calculated the cost of the energy cap at around 600 pence per therm for December gas. The actual cost for December contracts is now 435 p/therm.
The November contract is down to 294 p/therm – already at or below the guarantee. Predictions of an energy cap of £7,000 or more by next April were always dubious – if not a publicity stunt – since they overlooked demand destruction across Asia.
Goldman Sachs thinks European wholesale prices may fall a further 40pc by late winter. Average energy bills in the UK would in that case fall to £2,000 or less.
The Government could put its cheque book back in the drawer.
Douglas McWilliams, from the Centre of Economics and Business Research, says that the public finances are in better shape than widely-supposed.
Bracket creep largely offsets the fiscal effect of tax cuts announced by Kwasi Kwarteng, the Chancellor. “There are two stealth mechanisms at work. They give the Government £60bn to play with over two years,” McWilliams says.
One of them is the freeze in tax thresholds. The other is to hold public sector pay rises below inflation.