Gas prices reach their highest level in THREE years: Why are they rising and what does it mean for energy bills?

Gas prices have reached their highest level in three years after a major escalation in the Iran war, which risks plunging Britain into a fresh cost-of-living crisis.

After a retaliatory attack on a gas facility in Qatar overnight, UK natural gas prices spiked over 25 per cent on Thursday and now sit at a three-year high.

While gas prices are not yet at the level seen during the Ukraine war, if they remain elevated, it will start to pile pressure on households.

As suppliers start to pull fixed tariffs, this is what rising gas prices could mean for energy bills.

Why are gas prices rising?

UK natural gas prices have been on the rise since the start of the conflict, following disruptions to supply in Qatar and the closure of the key shipping route, the Strait of Hormuz.

This morning, prices jumped 20 per cent to 174p per therm at one point, their highest level since January 2023, after a huge escalation in the Middle East.

Iran threatened to launch a ‘full-scale economic war’ by ramping up attacks on oil and gas sites. It followed Israel’s attack on the world’s largest natural gas field, South Pars in Iran, which accounts for about 70 per cent of the country’s total gas production.

Iran’s retaliatory strikes on facilities in Qatar this morning sent prices even higher.

While gas prices have now eased from over 170p per therm to around 160p per therm, they are 15 per cent higher than the levels seen over the past week.

Crucially, prices are nearly two and a half times higher than they were before the start of the war.

The attacks on Qatar’s Ras Laffan, which is the main site for the production of liquefied natural gas (LNG), are a serious escalation which could take months or even years to recover from.

Why is the UK so vulnerable to gas price shocks?

The escalation in attacks on oil and gas sites is another shock to an already vulnerable gas market.

The impact of soaring oil and gas prices and supply disruptions will be felt across the world but the UK is particularly vulnerable to energy market shocks.

Around 85 per cent of households still rely on gas heating, but there has been a failure to produce enough gas domestically over the last few decades.

While successive governments have piled money into renewable alternatives, offshore wind farms take time to build, leaving Britain reliant on gas imports from Norway and Qatar.

When there is any disruption from supply, as is the case with Qatar at the moment, it leaves the UK in a precarious position. 

Furthermore, there is less gas storage here than in Europe, which adds further volatility to prices because of concerns over the security of supply.

Dwindling domestic gas production and disrupted imports leave Britain in a difficult position, with no immediate solution.

Britain’s energy auction system means that the most expensive energy source on a unit basis, usually gas, sets the marginal price of electricity. So even as more households move away from gas, they remain exposed to supply disruptions.

What about the North Sea?

As the UK faces a steep increase in energy prices, there are calls to explore for more North Sea gas.

On Wednesday, the owner of Britain’s largest oil field said it could be producing millions of barrels a day by the autumn if the Energy Secretary gives a green light to its plans.

Ithaca Energy said it is ‘entering the final stages of development towards first production’ – with the site forecasting up to 500 million barrels of oil and gas.

Greg Jackson, founder of energy supplier Octopus, has also urged the Government to ‘use what’s available’ in the North Sea.

However, Energy Secretary Ed Miliband has maintained that no new oil and gas licences should be issued in the North Sea, and that net zero is the best approach to improve energy security.

What does it mean for energy bills?

In the immediate term, households are protected from rising gas prices whether they’re signed up to a fixed or variable deal.

Households on a fixed deal will continue to pay their current unit rate until their deal ends, while those on a standard variable tariff are protected by the energy price cap, which will fall by over £100 from April.

From next month, the typical dual fuel household will pay £1,641 for their energy and will be protected until July, when the price cap changes again.

If the Middle East conflict resolves relatively quickly, the impact on households should be minimal, but if gas prices continue to rise, then it could flow through to the price cap by the summer.

That’s because Ofgem uses the average prices during the three-month observation window – which ends in mid May – and other related costs.

If it takes months to get oil and gas facilities back to full capacity in the Gulf, Britons could start to feel the effect of a higher price cap and fixed tariffs.

‘Wholesale gas prices are currently soaring due to the ongoing conflict in the Middle East, so an increase to the July price cap is looking likely,’ said Uswitch energy expert, Ben Gallizzi. 

‘Early forecasts currently suggest the cap could rise by over 11 per cent, adding around £200 to the average annual bill.

‘It’s still too early to know exactly what will happen to energy rates, as predictions could change if wholesale prices stabilise or pull back before the observation window closes.’

Suppliers are already starting to pull fixed deals from the market. At the start of the conflict, there were 39 tariffs on the market. By Thursday, there were only 18 available.

It’s also becoming more expensive to fix your energy bill. The cheapest tariff for an average household was £1,509 before the war, which has increased to £1,695.