No drop in energy bills ‘in months’ despite falling wholesale gas prices

Households have to wait months for falling electricity and gas prices.

Despite gas wholesale costs returning to pre-Ukrainian war levels, consumer energy prices are unlikely to fall this year but will stabilize, according to a number of experts.

This will likely come as a disappointment to consumers, who are upset that electricity and gas prices have doubled over the past year and a half.

The annual electricity cost for a typical household is now €2,000.

Consumers have hoped that the fact that wholesale gas prices on international markets have fallen would lead to price reductions.

Around half of the electricity consumed in Germany is generated from wholesale gas.

Europe’s benchmark gas prices are down 25 percent so far this month.

Energy researcher at University College Cork, Dr. Paul Deane said so-called “spot wholesale gas prices” have fallen dramatically. They are now lower than before Russia invaded Ukraine.

The spot price is the price to acquire an asset immediately.

But the prices that energy companies charge homes are based on futures prices, which is called hedging.

The futures price is an agreed price in a contract – called a futures contract – between two parties for the delivery of the asset at a specific time.

He said spot prices fell due to a relatively mild winter and European states’ ability to build up wholesale gas supplies. But utilities are tied to futures contracts.

He does not expect consumer prices to fall in the medium term.

dr Niall Farrell of the Economic and Social Research Institute (ESRI) said: “Energy companies are buying their gas upfront, so they may be locked into high prices from deals made earlier in 2022. It takes time for price changes to break through Retail prices.

“As a rule, spot prices reflect short-term fluctuations. Futures prices tend to reflect long-term trends. It is these long-term trends that are important in setting retail prices.”

He said consumer prices may have stabilized but he doesn’t expect consumer price cuts any time soon.

Daragh Cassidy of price comparison site Bonkers.ie said households were unlikely to see a drop in gas and electricity costs for at least a few months, saying: “Although wholesale gas and electricity prices have fallen in recent months, they are they still remain at elevated levels.”

He said at one point last summer the price of gas was rising well over 1,000 percent annually in wholesale markets.

And last March, the wholesale price of electricity in Ireland rose by over 400 percent year-on-year.

“So when we hear about falling prices, we have to remember that this is because prices have been at record highs since the beginning,” Cassidy said.

He said people should remember that the price households pay for their gas and electricity is usually an average price of energy costs in wholesale markets over the course of about a year or two, as suppliers spend most of their energy months or even buy a year year in advance through hedging.

This is to ensure security of supply and ensure that households are not confronted with extreme fluctuations in their energy prices on a weekly or monthly basis.

“One downside to hedging, however, is that falling energy prices aren’t passed on immediately, either,” Cassidy said. Because of the hedging, the price of energy on the wholesale markets needs to be sustainably reduced for several months before consumer bills are reduced.

“But hopefully there will be no further gas or electricity price increases in 2023 at least. And the outlook is better than it has been for several months,” said Mr. Cassidy.

Eoin Clarke of comparison site Switcher.ie said wholesale gas prices are falling but that is not yet taking pressure off household budgets as the cost of living still worries many.

“There’s no guarantee energy bills will come down any time soon, but by cutting back on some daily routines and swapping out everyday appliances, you could save €850 a year,” he said.

Mr Clarke said those savings could be realized by running one less washing machine cycle per week, cutting shower time from 15 minutes to 10 minutes a day, swapping out an electric oven for smarter appliances like a slow cooker or air fryer and using a laptop instead of one desktop computers.