Key Takeaways
- Surging gas prices have caused concerns for countries reliant on energy imports, including the UK.
- Supply disruption to imports is likely to send UK inflation higher in the coming months, economists say.
- The cost of energy is a key worry for consumers and policymakers.
UK energy bills are expected to rise again in 2026 as natural gas prices soar during the Iran war, with the latest attacks on key energy infrastructure heightening anxiety about supply disruption. While the impact will depend on how long the conflict lasts, higher wholesale gas costs are likely to feed into household bills and keep inflation elevated in the months ahead.
UK gas prices have risen sharply since the conflict began three weeks ago, with short-term futures nearly doubling in recent weeks, prompting fears of an inflationary surge among nations reliant on imports. Still, Morningstar utilities analyst Tancrede Fulop says the market is not yet pricing in a long energy crisis.
And energy prices are way off those seen in 2022 following the outbreak of war in Ukraine, which ultimately sent UK CPI inflation to 11.1%.
How Much Does the UK Rely on Gas for Energy?
As a significant importer of liquefied natural gas (LNG), the UK could be particularly vulnerable to an energy price shock, experts say.
And looking at the nation’s energy mix, it’s clear the UK is heavily reliant on gas for heating homes and electricity generation.
According to the National Energy Systems Operator (NESO), almost 30% of electricity in the UK was generated using gas in February, the second highest source behind wind.
Though over half of UK natural gas comes from UK and Norwegian fields via the North Sea, 35% is from LNG imports, much of which comes from Qatar through the Strait of Hormuz.
UK gas supplies are run on a “just-in-time” basis, meaning they rely on continuous domestic production and imports of gas to meet demand, rather than holding large reserves in long-term storage as favored by European peers. The approach means the UK may be more susceptible to price spikes in times of volatility.
Qatar, a major exporter of LNG, has halted production since the start of the conflict as Iran continues strikes on tankers trying to navigate the Strait of Hormuz. Iranian airstrikes on the Ras Laffan industrial plant in Qatar on March 18 are also expected to increase the economic impact of the war.
Why Low Gas Storage in Europe Matters for UK Energy Bills
In response to oil market disruption, the International Energy Agency released oil reserves last week to help ease markets. There is no equivalent reserve mechanism for the LNG market, however. Neuberger analyst David Waugh says this makes the natural gas market structurally tighter than oil. Even if the conflict de-escalates quickly, he says Europe’s need to refill storage ahead of next winter will amplify demand pressure.
One mitigating factor could be that the conflict broke out in March, at a time where LNG stores are low as Europe emerges from winter. The UK consumes less gas over the summer months as less energy is needed to heat homes.
WisdomTree’s head of commodities and macroeconomic research, Nitesh Shah, says this provides an opportunity to rebuild inventories ahead of next winter but warns a sudden cold snap in the coming weeks could be even more damaging.
“I wouldn’t rule out natural gas prices doubling within a matter of days if conditions deteriorated—it could easily happen,” he says.
How Rising Gas Prices Affect UK Inflation and Energy Bills
The obvious impact of surging gas prices on the UK economy is its effect on inflation, which is likely to move higher than forecast as the higher cost of energy filters through to consumers and businesses.
Gas is also a key input for fertilizer production, meaning higher prices quickly feed through into food costs and household energy bills.
“This over dependence upon gas means its hugely influential on both inflation and the overall economy,” says Mirabaud Asset Management CIO, Andrew Lake.
“The cost of energy has been front page news for years, and the increasing cost of energy means that consumers have less disposable income to spend elsewhere in the economy. It also hits energy intensive industries. Overall inflation goes up and economic activity goes down.”
The uncertainty lies in how high it will go, and whether the Bank of England chooses to respond by pausing rate cuts, or even initiating hikes.
Morningstar economist Grant Slade says talk of rate hikes are “overdone”, however, given the tendency for central banks to ‘look-through’ energy shocks.
How Does the Current Spike Compare to the Ukraine War?
Prior to the conflict, the Bank of England forecast CPI inflation to drop to 2.1% in April. Andrew Wishart, senior UK economist at Berenberg, now expects this to be at least 2.6%, assuming the conflict is short-lived. However, he says the energy shock should not be a repeat of the Ukraine war with broader economic conditions far different to 2022.
The worst-case scenario for markets is the threat of a protracted conflict. A prolonged disruption to energy markets would be devastating for the UK and world economy, according to Chelsea Financial Services managing director Darius McDermott. However, this doesn’t appear to be the market’s expectation.
Gas prices have remained elevated since the disruption caused by the ongoing Ukraine war, and Mirabaud’s Lake says we should expect prices to continue to rise should the Iran war continue for longer than currently expected.
He says: “20% of global LNG production has been disrupted, with Qatar temporarily stopping exports—this has the potential to become much more serious.
“Should the conflict end soon, then we expect both oil and gas prices to drop, albeit not back to the levels pre conflict.
“This will have some inflationary impact, but the BoE may look through this and focus on the economy. Rate cuts would be delayed but would resume at some point. It would not mean the end of the cutting cycle.”
However, if the war escalates and energy prices remain higher for longer, he expects a major impact upon global growth.
“The likelihood is that the UK will be significantly affected by this, and with an already high fiscal burden plus inflation and growth headwinds, the room for maneuver is limited.”
What Rising Gas Prices Mean for Your Energy Bills
There are also concerns over what the price rise could mean for the energy price cap. The cap, which is set every three months by regulator Ofgem, is a maximum limit suppliers can charge customers for gas and electricity.
Household energy bills are set to fall by an average of £150 at the next adjustment in April. However, consumers will be focused on the next three-month period starting in July, when effects of the oil and gas price surge will be taken into account.
WisdomTree’s Shah says energy bills are likely to go up as a result of the conflict.
“Price caps will smooth the impact, but the pressure is on the upside,” he says. “To the extent that bills are allowed to increase, they will increase. That will be damaging for households unless there are policy offsets.”
After the Russian invasion of Ukraine in 2022, the UK government stepped in to provide a multi-billion pound support package, which meant discounts for bills for all households. This time around the government has signalled a more targeted and smaller-scale approach to help poorer households.
“Even if offsets are introduced, they come at a cost to the government budget,” Shah adds. “Debt will increase in some form, and that ultimately means either higher taxes or higher debt repayments. Either way, it’s a cost to society.”
