Consumers paid on average £75 more in the year after the EU
referendum for gas and electricity, according to research by UCL.
A hard Brexit could lead to a further average rise of £61
per year in the event of further devaluation of sterling to
pound-euro parity.
The UCL researchers found that energy bills increased
overall by £2 billion in 2017 due to the lower value of sterling
relative to the euro and US dollar. The average wholesale prices
of electricity and gas rose by 18 per cent and 16 per cent
respectively in the year after the referendum, translating into a
£35 increase for electricity and £40 for gas.
Lead author Dr Giorgio Castagneto Gissey (UCL Bartlett
School of Environment, Energy & Resources), said: “We know
that exchange rates fell after the EU referendum but we can now
look at the effect this had on wholesale and consumer energy
prices.
“The exchange rate depreciation plus the fact that energy
prices are now much more volatile means consumers have been
paying more and are facing even higher bills over the next
several months.”
The wholesale gas price makes up 39 per cent of the price
paid by consumers, so the 16 per cent increase resulted in a six
per cent (£40) increase in retail prices. The variability of
wholesale gas prices increased by 60 per cent in the year after
the vote.
Co-author Professor Michael Grubb (UCL Bartlett School of
Environment, Energy & Resources)
said: “Forecasts always carry some uncertainty,
but this research pinpoints historical fact: the referendum
result, through its impact on exchange rates, has been the
principal factor driving up UK household energy prices over the
past two years.”
The Government passed a law in July giving Ofgem the power
to set a price cap, and subsequently a cap said to save the
average household £75 a year on standard tariffs has been
proposed.
The predicted price rise of a further £61 resulting from a
hard Brexit breaks down into £29 from electricity and £32 for
gas. This corresponds to a predicted extra £1.5 billion added to
consumers’ annual energy bill from the end of March 2019 to the
end of March 2020.
The academics analysed the behaviour of the wholesale
electricity price in the UK alongside the sterling to euro
exchange rate between 2012 and 2017, finding that as the exchange
rate fell dramatically after the EU referendum the electricity
price increased over the subsequent year, directly reflecting the
resulting higher cost of energy imports.
The prediction following a hard Brexit is based on an
assumption of a further depreciation of sterling to sterling-euro
parity, with a 12 per cent drop from the exchange rate of 1.14 on
the 3 November 2018. The change in annual bills was calculated
assuming everything else is held constant between 29 March 2019
and 29 March 2020.
The team behind the overall report used several data types;
electricity generation and thermal efficiencies of fuel-intensive
plants were used to calculate the shares at margin, with fuel and
imbalance prices and volumes used to model electricity prices and
derive pass-through rates.
For the overall report, the researchers aimed to understand
the principal determinants of electricity wholesale prices in the
UK and some major European markets. Those considered additionally
were Germany, France, Italy, Spain, the Netherlands and Norway
from 2012 to 2017. The report found Great Britain to be among the
most cost-reflective of a sample of European electricity
wholesale markets.
