Tumbling gas prices thanks to unseasonably warm weather could save the government billions of pounds in energy subsidies and debt interest payments, raising questions about how the chancellor might spend the money instead.
Analysts have calculated that the Treasury could save the estimated £13 billion it planned to borrow to pay for a household energy cap this year, giving Jeremy Hunt sizable headroom before his spring statement.
The UK’s wholesale gas prices dipped below pre-Ukraine war levels this month, to as low as £1.62 per therm last week. That compares with a peak of £6.40 at the height of the energy crisis in August and is a drop of more than 50 per cent since the start of December.
Prices have fallen because unusually warm temperatures in the UK and Europe have reduced demand for energy and because demand in China has been depressed by a rising number of coronavirus cases.
Falling gas prices will reduce the cost of the government’s energy price guarantee, which has capped the typical household energy bill at £2,500 since October. The Treasury borrows to pay the difference between the cap and market prices. The cap was due to be raised to £3,000 from April, at a cost of £12.8 billion in 2023-24, according to the Office for Budget Responsibility.
In a new analysis the Centre for Economic and Business Research (CEBR) has calculated that a fall in market gas prices that mirrors the recent decline would wipe out the need for £12.8 billion in extra borrowing.
“The additional fiscal headroom could be used to address the crises that the UK currently faces, including an imploding health system,” said Kay Neufeld, head of forecasting at the CEBR. “A prudent approach would be to retain at least some of the windfall, which would help to further restore confidence in the UK’s fiscal policies.”
The CEBR calculations are based on modelling that would lead prices to hit £1.54 per therm in January next year.
The government will get an extra fiscal boost from lower interest rate payments on inflation-linked debt as falling gas prices will help to bring down inflation. The CEBR said that if current market prices were maintained, consumer price inflation could fall three percentage points more than current Bank of England forecasts this year.
Rishi Sunak, the prime minister, has laid out his priorities for the year, including getting debt on a downward trajectory and halving inflation of 10.7 per cent. The inflation goal was already looking achievable according to Bank forecasts, and could fall below an expected 5 per cent by the end of the year if energy prices stay at pre-Ukraine war levels.