The Office for Budget Responsibility’s latest forecast is out, and it makes for grim reading. The energy price cap, that blundering regulatory tool meant to shield households from market volatility, is set to rise again. Families will feel the squeeze just as the geopolitical temperature hits boiling point. It is a classic case of unintended consequences: a policy designed to bring stability now fuels uncertainty.
Let us start with the numbers. The cap, currently set at £1,971 per year for a typical dual-fuel household, is projected to jump by nearly 20% in the next quarter. That translates to an extra £400 per household annually. For the millions already stretched by stubborn inflation and rising mortgage costs, this is a hammer blow. The timing could not be worse. Winter is coming, and so is the energy crunch.
But why is this happening? The answer lies in global markets and a series of self-inflicted wounds. The cap is pegged to wholesale prices, which have surged as Russian gas supplies dwindle and OPEC+ production cuts bite. The government’s decision to cap prices artificially has not insulated us from reality; it has merely deferred the pain. The taxpayer is now on the hook for the difference, via the Energy Price Guarantee scheme. That is fiscal folly of the highest order.
The bond market is already voting with its feet. Gilt yields have spiked, reflecting rising risk premiums on UK debt. The pound, once a safe haven, has slid against the dollar and euro as capital flight accelerates. Investors are spooked by the UK’s twin deficits: a current account deficit that screams overconsumption and a fiscal deficit that shows no signs of tightening. The Bank of England is caught between a rock and a hard place. Raise rates to quell inflation, and the housing market cracks. Hold steady, and the pound plunges further.
Let us not forget the geopolitical dimension. The crisis in Ukraine shows no sign of resolution, and energy remains Moscow’s favourite weapon. The UK’s reliance on LNG imports leaves it exposed to global spot prices. Any disruption in the Middle East or a harsh European winter will send prices spiralling again. The cap may protect households from the immediate shock, but it does not build resilience. We need more domestic production, more nuclear power, and a grid that can keep the lights on without bankrupting consumers.
Alastair’s bottom line: This is a crisis of policy, not just markets. The cap was a political quick fix that has morphed into a fiscal nightmare. Families will pay the price, not just in higher bills but in the erosion of the pound’s purchasing power. The government must face reality: subsidies are not a long-term solution. They merely redistribute pain from the private sector to the public purse. Eventually, that bill comes due.
For now, batten down the hatches. The winter of our discontent is upon us.
