Warm Weather Saves UK Government £260M

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The warm Autumn has saved the government an estimated £260M, according to new research.

BFY Group, an energy and utilities management consultancy, says above-average temperatures have reduced national gas demand as households have used less heating.

Temperatures this October have been 1.27° above the seasonal norm, resulting in a 6 TWH reduction in domestic gas usage based on the historical trend of gas usage vs. temperature, shows the research.

This equates to a reduction of 19% versus the typical October domestic demand, says BFY Group.

In a typical year, this means the government would have needed to pay £2.94BN to cover the costs of the Energy Price Guarantee (EPG) over this period.

"With the reduction in usage, we estimate that this is reduced to £2.68BN, a saving of £260M," says BFY Group.

The research adds UK households will have also benefited from needing to use less gas to maintain a comfortable temperature, with savings estimated to total £600M, or £17 per household.

"The level of savings seen shows how beneficial it would be to reduce consumption and highlights the need to focus on energy efficiencies," says BFY Group.

The findings come as the price of UK gas continues to fall, with the December forward contract slipping below 300p/therm level this week:

Analysis from NatWest suggests it is at 300p/therm that the Government's EPG becomes cost-free.

The government said at the time of its launch the cost of the EPG was likely to come in at around £60BN for the final quarter of 2022 and the first quarter of 2023.

This estimate for the EPG to cost £60BN assumes wholesale spot gas prices of 600p/therm in December.

NatWest Markets calculates the Energy Price Guarantee 'strike' for wholesale gas - which eliminates the cost entirely for the government - might be close to a spot price of 300p/therm in December.

The EPG caps the per unit cost of electricity and gas for a period of two years.

Prices per unit will be capped at 10.33p kWh for gas, which equates to approximately 300 pence per therm, and 34p kWh for electricity.

The total cost to individual households and businesses is therefore not capped, but the government says an average household would pay £2500 per year at historical usage rates.

The government will compensate any losses due to energy providers if wholesale prices rise above these capped levels.

NatWest says energy companies hedge over time for customers on fixed contracts and use the December 2022 futures price for January-September.

They assume that the EPG will compensate energy firms only where they have locked in at a price above 300p/therm (~40% of fixed contracts).

The total cost to the government under this scenario is estimated to be £64BN by NatWest, vs. the government's £60BN.

Wholesale gas prices for December delivery suggest the spot will be at 435p/therm, NatWest says if realised, the cost of the EPG would be halved to £30BN.

And, were spot prices in December to land at 300p/therm, the cost of the EPG becomes zero.