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Energy costs extremely volatile as impact of Russian invasion of Ukraine reverberate through market, says Cornwall Insight

The UK sources just 4% of its gas from Russia, but the impact of the war on the wider European gas market will drive up costs.

The UK sources just 4% of its gas from Russia, but the impact of the war on the wider European gas market will drive up costs.

The cost of energy is extremely volatile currently due to Russia invading Ukraine, said Cornwall Insight.

Its modelling for the default tariff cap sees its prediction for the winter cap jumping by hundreds of pounds from day to day. For example, it increased by over £200 from 23 February to 24 February, before falling on 25 February and rebounding again on 28 February.

Despite these fluctuations, the research company still expects the cap to increase by nearly £500 come October, on top of the already high price cap coming into force in April. Ofgem raised the default tariff price cap by more than 50% to £1,971 for the coming period, on the back if high gas prices.

Assessment date

Default tariff cap forecast, Winter 2022-23 (£/annum, typical dual fuel customer)

Daily % change

Default tariff cap forecast, Summer 2023 (£/annum, typical dual fuel customer)

Daily % change

Wednesday 23rd February 2022

£2,521

-

£2,043

-

Thursday 24th February 2022

£2,740

+8.70%

£2,127

+4.1%

Friday 25th February 2022

£2,452

-10.50%

£1,979

-7.0%

Monday 28th February 2022

£2,497

+1.84%

£1,978

-0.0%

Source: Cornwall Insight.

Cornwall Insight is predicting that average annual bills will jump again to around £2,500 from October, while other companies such as Investec have predicted the cap could hit £3,000 following the invasion of Ukraine.

“The tragic events currently unfolding in the Ukraine have had a deep effect on all of us, and it is essential that we keep the human impact of this conflict at the forefront of our minds. Our commentary is by no means to distract from the heart-breaking consequences of these events, but it is however sadly inevitable that the conflict will have wide ranging implications for all of Europe, not least on the supply of energy to the continent,” said Dr Craig Lowrey, senior consultant at Cornwall Insight.

“The heavy reliance on gas imports across Europe and in the UK has left energy prices increasingly vulnerable to unstable international geopolitical and economic situations. With the potential supply disruption from Russia reverberating throughout the European energy market, volatile energy prices are likely to continue for the foreseeable future.”

The UK sources less than 4% of its gas from Russia, Cornwall Insight highlighted, and therefore it is unlikely that there will be a supply issue. However, given much of Europe’s reliance on Russian gas, price impacts will likely be felt throughout the entire European gas market.

Energy secretary Kwasi Kwarteng similarly highlighted the volatility of energy prices in a tweet on Monday (28 February), where he pointed to the wholesale price of gas quadrupling in UK and Europe and the need therefore to move away from gas.

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While the cost of electricity is cushioned somewhat by renewables, gas is still used to generate 40% of the UK’s electricity mix, and will therefore be impacted by continued volatility in the European gas market.

“While questions are predictably turning to how we stabilise the energy market, with countries around Europe looking to rebalance their import rates and diversify the energy they use, it is clear that in the short-term energy prices will continue in their upward trajectory,” finished Lowrey.

“To mitigate the impact of rises on consumers and the wider economy, the UK government may need to reassess the level and scale of its financial support to households.”

In response to the increase in the spring/summer default tariff cap Chancellor of the Exchequer Rishi Sunak announced a support package including a one-off repayable £200 loan, a £150 council tax rebate and a discretionary fund.

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