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Energy price cap still above pre-crisis levels despite falling wholesale prices | Business News

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The reason for the fall in the domestic energy price cap is quite simple – wholesale electricity and gas prices have fallen since the cap was last set in February this year.

Wholesale gas and electricity prices make up by far the largest proportion of energy bills – £720 the current £1,690 – and Ofgem is assuming, for July, August and September, a wholesale electricity price of 22.36 pence per kilowatt-hour (kWh), down from 24.50 pence per kWh during the current quarter.

It is also assuming a wholesale gas price of 5.48 pence per kWh from July to September, down from 6.04 pence per kWh during the current quarter.

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This reduces the wholesale energy component of the typical bill (which is based on the assumption that a household will use 12,000 kWh per year of gas and 2,900 kWh of electricity) from £720 to £619.

The question some people may have, however, is why the energy price cap which Ofgem set for the three months from July remains higher, at £1,568, than the level at which it was set – £1,277 – at the time the energy crisis was triggered by from Russia invasion of Ukraine.

At first glance, this seems a very reasonable question, given that a barrel of Brent Crude – a very reasonable indicator for wholesale energy prices – is currently selling for US$80.78 (£63.50) per barrel, below the highs which reached after the invasion.

Quarterly Price Cap

But bear in mind that back then, the price cap was only set by Ofgem every six months, not quarterly as it is now.

The price limit in force immediately before the crisis came into force, on October 1, 2021, was set on August 6 of that year.

Before that, wholesale energy prices were lower than they are now. The wholesale energy component for the price cap for winter 2021/22 was therefore £528 – down from the £619 it will be from July.

Other costs taken into account by Ofgem are also higher now than they were before Russia invaded Ukraine.

Rising costs

The network costs borne by Ofgem, for example, are now £363, compared to £268 in winter 2021-22.

Supplier operating costs are assumed to be £223 this summer, compared to £203 in winter 2021-22.

And the political costs – largely due to the costs imposed by the government’s social and environmental schemes – are expected to be £188 this summer, compared with £159 in the winter of 2021-22.

All of these higher costs largely reflect rising levels of inflation seen in economy since Russia invaded Ukraine.

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Energy suppliers will have seen their staff costs (which, apart from wholesale energy, is their biggest cost) rise sharply due to wage inflation.

The same goes for network operators.

And everyone will have similarly seen their operating costs rise due to higher energy prices and higher prices for other raw materials.


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Think of it this way. The global inflation rate has fallen from a peak of 11.2% in October 2022 to just 2.3% in April.

But price increases for individual items in the inflation basket since then have, in most cases, remained in place and have been compounded.

Positive inflation

Inflation is still positive.

So, for example, the average price of an 800g white loaf of bread, which cost £1.30 in October 2022, is now £1.40 today.

The same happens with the cost of bringing electricity and gas to families.

All of these costs have risen since the winter of 2021-22 – which is why, despite the recent fall in wholesale electricity and gas prices, this summer’s energy price cap will still be almost £300 more than it was before Vladimir Putin plunged the world into an energy crisis.



This story originally appeared on News.sky.com read the full story

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