Energy bills to rise hundreds of pounds to three-year high

Average annual energy bills will rise by £332 in July, more than double the previously anticipated increase, due to high oil and gas prices driven by the war in Iran, trusted forecasters predicted.

If it comes to pass, it will mean the most expensive typical annual bills in three years, at a high last seen in July 2023.

Less than three weeks ago, in the early days of US-Israeli strikes on Iran, that rise was expected to be £160, according to estimates from research firm Cornwall Insight.

But as the oil and gas prices spiked and remained about $110 per barrel of benchmark Brent crude oil and above 120 pence per therm of UK wholesale gas, it's pushed up the amount suppliers can charge.

What's the energy price cap?

Higher wholesale costs drive up the price cap, which sets a limit on how much suppliers can charge per unit of gas and electricity.

Energy regulator Ofgem sets the price cap every three months based on wholesale costs. Wholesale costs, however, are only part of energy bills, with policy costs and charges making up the remainder.

Heating oil is not subject to a cap and so the price of filling up a home heating oil tank has increased by more than 100%, with the government launching £53m of support for vulnerable households.

The price cap has already been set for next month, so bill payers are in line for a yearly price fall of £117 for the three months from April.

The official energy price cap announcement for July will be made on 27 May and there may be changes before then.

A headache for government and households

For now, the forecast rise appears to pose a problem for the government's promise to reduce bills by £150 by removing policy charges and instead funding them through general taxation.

With such high wholesale costs it's unclear how that budget pledge can be met.

That headache is compounded by the fact it's these high energy prices that will increase prices across the board, possibly leading to a new round of inflation and exacerbating the cost-of-living crisis.

Economists have said inflation could be as high as 5% by year's end, compared with the 2% that was expected pre-war.

As a result, traders now see three interest rate hikes as likely this year, bringing the interest rate to 4.5% before 2026 is out.

That's already affecting mortgage rates on offer, with the typical two-year fixed deal currently 5.35%, with the average five-year rate at 5.39%, according to financial information company Moneyfacts. Such expensive average mortgage rates haven't been seen since March last year for the two-year fixed deal and July 2024 for a five-year deal.

Interest rate hikes being priced in also adds to the government's problems. On Friday, the cost of UK government borrowing reached the highest level since 2008.

(c) Sky News 2026: Energy bills to rise hundreds of pounds to three-year high