Ofgem confirmed this week that the energy price cap will rise by 3.6% from 1 October, taking the average dual-fuel household bill to £1,723 a year. On its own, that’s a modest increase by the standards of the past few years. What makes it worth a closer look is everything sitting underneath it: a government VAT cut that was supposed to soften the blow, a European gas storage picture that hasn’t looked this thin in close to two decades, and a shipping conflict six thousand miles away that is doing more to set UK energy prices this month than anything happening domestically.
A VAT cut that barely moved the needle.
The government’s headline move this autumn was cutting VAT on electricity from 5% to 0% for six months, running from 1 October to 31 March. It was framed as meaningful relief ahead of winter. Ofgem’s own numbers suggest otherwise. Without the VAT cut, the October price cap would have risen by around 6%. With it, the rise came in at 3.6%. The cut took roughly two and a half percentage points off the increase, not the increase itself. Gas was left out of the change entirely and still carries 5% VAT on both unit rates and standing charges, which matters because gas is still what sets the marginal price for a large share of UK electricity generation.
Martin Lewis called the move a “good totemic step” but was blunt that most people won’t feel much benefit in practice, since it’s being outpaced by the underlying rise in wholesale costs. For UK businesses, who don’t benefit from the domestic price cap at all and buy largely at wholesale-linked or fixed-term rates, the VAT change is close to irrelevant. What matters to a business renewing a contract this quarter is what’s happening in the wholesale market, and that picture has deteriorated sharply since the summer.
Storage levels that haven’t been this low in years!
European gas storage entered September at some of the lowest seasonal levels on record, with EU-wide inventories reported in the high 50s to mid-60s percent full, well short of where the continent would normally sit heading into the winter drawdown season. Some analysts are describing it as the thinnest buffer in fifteen to eighteen years. The reasons are a mix of the ordinary and the unusual: a colder-than-expected end to last winter left less gas in the ground to begin with, and this summer’s restocking effort was disrupted by a near-disappearance of Qatari LNG cargoes and intensified competition from Asian buyers for the LNG that was available.
Britain’s own position is more exposed than most of Europe’s, because the UK simply doesn’t have much storage to begin with. Total UK gas storage capacity amounts to something in the region of two to three weeks of average winter demand even when full, a fraction of what countries like Germany can call on. The situation this year is worse than usual because Rough, the offshore facility that accounts for roughly 70% of Britain’s total storage capacity, was sitting at around 30% full in early September, against 80% a year earlier. Centrica, which operates Rough, has been pushing the government for financial support to offset the cost of filling it at current high prices, and has been reluctant to commit further capital without that backing. The result is a country entering the coldest months with less of a cushion than it has had in years, at exactly the moment European supply is tightest.
**Iran, the Strait of Hormuz, and a price shock nobody priced in
The immediate trigger for this month’s price spike sits well outside Europe’s energy system. Since late August, the United States and Iran have exchanged direct military strikes in and around the Strait of Hormuz, including US action against Iranian oil tankers and retaliatory Iranian strikes on commercial and US-linked vessels. Traffic through the strait, one of the world’s most important routes for both oil and LNG, has fallen to some of its lowest levels in months. Brent crude pushed past $100 a barrel for the first time since the early stages of the Ukraine war, and oil prices are up more than 8% for the month.
Gas markets have moved in sympathy. UK wholesale gas prices have reportedly more than doubled since the start of the year and are running at levels not seen since 2022, with a roughly 20% jump since the start of September alone adding an estimated £50 to a typical annual bill even before that shows up fully in the regulated cap. Some analysts are now flagging the possibility of a much sharper price cap increase in January, with figures as high as 13% being discussed, largely contingent on how the Hormuz situation and the winter weather play out over the next two months.
What does this mean for UK businesses?
None of this is guaranteed to get worse. Shipping disruptions can ease, storage can be topped up if prices allow, and geopolitical crises have a habit of resolving faster than markets expect. But the combination of thin reserves, a live supply-side conflict, and a price cap that’s already risen despite policy support gives little room for complacency. Businesses with contracts up for renewal this winter, in particular, are facing a market where the downside risk from a further escalation in the Gulf is real and largely outside anyone’s control. Locking in rates, reviewing consumption patterns, and treating volatility as the base case for this winter, not the exception, all look like sensible starting points. The price cap tells households what they’ll pay. It tells businesses very little about what they’re actually exposed to, and that gap is worth paying attention to over the next few months.
Britain Heads Into Winter With Thin Gas Reserves and a Middle East Wildcard
A price cap rise that survived a VAT cut, a gas store running at half its usual level, and a shipping lane that keeps making headlines for the wrong reasons.
