British energy price cap to rise 4% as Iran war pushes up costs

By Susanna Twidale

Aug 26 (Reuters) - Most British households will see their energy bills rise from October after energy regulator Ofgem announced a 4% hike in its domestic price cap as the war in Iran pushes up wholesale costs.

The rise will be a blow to the new Prime Minister Andy Burnham, who has pledged to ease cost-of-living pressures, and more than wipes out measures he announced last month to cut tax on electricity bills.

"High international gas prices are continuing to drive energy costs in the UK. We welcome the government’s intervention to remove VAT from electricity bills, without which customers would have faced even higher costs this winter,” said Neil Kenward, Ofgem’s director general for markets.

The increase, a £60 rise to £1,723 ($2,348) from the previous cap for July to September, will hit around 22 million households on variable tariffs, with the price cap covering around 65% of customers.

WHOLESALE ENERGY PRICES HAVE SOARED

Benchmark wholesale British gas prices have more than doubled since the U.S. began military action against Iran on February 28, severely curbing shipping through the Strait of Hormuz, the transit route for a fifth of the world's liquefied natural gas.

Wholesale costs are the biggest single driver of Ofgem's quarterly price cap, which limits what suppliers can charge households and also reflects network and policy costs.

Britain’s energy minister said consumers will be concerned about the costs of bills this winter.

"We will keep looking at what more we can do to protect families from unaffordable bills," Miatta Fahnbulleh said in a statement.

The removal of the VAT on electricity prevented the cap from rising by an additional £45. In April the government also shifted some levies to cut around £150 from an average bill.

WORSE TO COME

With little sign of an end to the conflict between the U.S. and Iran, analysts forecast wholesale energy costs are likely to remain elevated and the price cap could continue to rise.

Analysts at Cornwall Insight forecasts that at current wholesale prices, the cap could rise a further 9% in January to £1,872.

"Even if we saw an end to the conflict, lower stocks going into winter as demand increases mean falling bills in January (are) unlikely," said Craig Lowrey, principal consultant at Cornwall Insight.

($1 = 0.7337 pounds)

(Reporting by Susanna Twidale in London, Ankita Bora and Yamini Kalia in Bengaluru; Editing by Janane Venkatraman and Jan Harvey)