Plummeting gas prices will bring a big windfall for the Chancellor, and ease the cost-of-living crisis next year

New Resolution Foundation briefing The only way is down by Emily Fry and James Smith identifies:

Very good news on bills (lower than they would have been) but it might not feel like it (still rising)

  • Typical annual energy bills are now forecast to be around £2,400 next year (2023-24), down from the forecast of £3,000 at the time of the Autumn Budget i.e. the level of the 2023-24 Energy Price Guarantee (EPG).
  • However, energy bills are still set to be 20 per cent (or £400) higher than they have been this year (2022-23), due to the scaling back of government support. In the year running up to the pandemic (2019-20), typical bills were just £1,200 a year.

Energy costs are on course to be deflationary by the autumn

  • Soaring energy bills have been the primary driver of high inflation in the UK (and elsewhere). Falling prices mean that energy costs could be set to go from propping up overall inflation by 3.2 percentage points in February 2023, to reducing it by 0.4 percentage points in October 2023.

Government support is now very focused on low-and-middle income households

  • Falling gas prices mean that universal support with bills, delivered via the scaled back EPG, is down by almost 90 per cent next year. This, combined with slightly higher Cost-of-Living payments, mean that the poorest fifth of households are set to receive six times as much support with their energy bills as the richest fifth of households (£840 vs £140).
  • Total energy related support for the poorest fifth of households is still down 60 per cent on this year.

Lower support costs mean a big windfall for the Chancellor, but some tax receipts will also fall

  • Falling prices mean the estimated cost of the EPG in 2023-24 has fallen from £12.8 billion to £1.5 billion.
  • These falls should also mean reduced tax receipts from energy producers and generators, which our estimates suggest could be in the region of around £7 billion. However, other taxes will be boosted as lower energy bills raise households’ consumption and firms’ profits.

Emily Fry, Economist at the Resolution Foundation, said:

“Falling wholesale gas prices have been the big economic good news story of the year so far. This will bring real benefits to families, even if it might not feel like it for some time to come.

“While energy bills are still set to rise next year by another £400, we’re not on course to see the sustained £3,000 annual bills many feared. The estimated cost of the EPG next year is also due to fall by almost 90 per cent. This will give the Chancellor a big windfall in his upcoming Budget, partially offset by lower windfall tax revenues.

“The cost of living crisis is far from over, but falling gas prices mean that it’s looking less bleak than just a few months ago.”