Home energy bills may not fall for up to two years despite drop in wholesale prices

Wholesale gas costs, which drive retail prices higher, have fallen in recent months following a mild winter.

The European Union reduced its reliance on Russian gas following its invasion of Ukraine, which pumped up wholesale prices to multiple of their levels prior to the war.

Households could be waiting up to two years before they see a significant drop in energy costs, leading energy suppliers have said.

Wholesale energy costs, which drive retail prices higher, have fallen rapidly in recent months following a mild winter and increasing levels of storage. However, consumers are unlikely to see the effect of this drop in their incoming utility bills.

“The lag between movements in the wholesale market and movements in retail prices is a function of both the rate of change in the wholesale market and the tenure of forward hedging positions, which can be in the range of between 18 to 24 months," Electric Ireland said in a statement to the Irish Examiner.

“Energy suppliers typically hedge energy costs in advance to secure costs for the upcoming year, so any increases or decreases in the wholesale market can take some time to feed into retail prices seen by residential customers,” said the State-owned energy company, which has the largest share of electricity customers in Ireland.

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Bord Gáis Energy, which holds 41% of Ireland's residential gas market, made similar comments, saying it purchases energy up to 18 months in advance.

The firms made the comments following a report by Single Electricity Market Operator (Semo), showing a 41% drop in wholesale gas prices in the final quarter of 2022 compared to Q3.

The European Union reduced its reliance on Russian gas following its invasion of Ukraine, which pumped up wholesale prices to multiples of their levels prior to the war, which eventually hit Irish energy consumers’ pockets.

Companies 'looking to reduce prices'

High prices have led to energy companies posting surging revenues amid the cost-of-living crisis. Some companies have taken steps to somewhat soften the blow of costs for consumers.

Asked on future pricing plans, SSE Airtricity said it would forego profits for the financial year to help its customers. 

“We actively monitor energy markets and, as we have done before, will look to reduce our prices as soon as market conditions allow,” said SSE Airtricity.

In late December, Electric Ireland announced that it would also forego profit from its residential electricity business and gave a €50 credit to customers after it increased prices three times last year. Its Hardship Fund was also increased by €2m to €5m.

Energia, which also increased prices for customers twice last year, said it will “monitor wholesale electricity and gas prices on an ongoing basis, and we will continue to do so with any future changes to customer pricing being carefully considered, and proactively communicated accordingly”.

Bord Gáis Energy said it will make no profit in residential energy supply in order to protect customers. 

"Our team of expert trading analysts purchase our energy on the forward market rather than on the more volatile spot market," it said. 

"This means that we buy energy up to 18 months in advance of when it is used by our customers. We do this to protect our customers, in so far as we can, from ongoing extreme price volatility of the energy markets. 

"For this reason, the recent downward fluctuation in wholesale energy prices is not reflected in current customer prices."