Martin Lewis: Will the Trump effect mean your UK energy bills get cheaper?

Watch Martin's video explainer

Full transcript of what Martin said in his video

Martin Lewis: "Will the Trump effect mean your energy bills in the UK get cheaper? Hello, I'm Martin Lewis of MoneySavingExpert.com. The short answer is: yes, but only a little. Nothing to write home about. Many people have been asking me about this, so I want to try and explain in detail, though it is a bit complicated."

Trump's tariffs have caused wholesale energy prices to drop

Martin: "First, what do I mean by the Trump effect? Well, I'm talking specifically about the economic bombshell of huge tariffs that were put on imports to the United States. So when other countries send goods to the United States, there's now a tariff, a tax levied on them when they're imported.

"It was meant to be an economic disruptor. It has certainly been an economic disruptor, though whether it has been a disruptor in the way that was intended is a wholly different question.

"Now, the reason this will potentially affect our energy bills, or almost certainly affect our energy bills, is because of market fears of a possible US recession or worldwide recession – or, if not a recession, at least an economic downturn – which is not the best news.

"And, in simple terms, the way this affects it is: the idea that the economy is going to be worse means there would be less demand for oil, which has brought the oil price down – because the price of these things is based on predictions of what's going to happen in the future – and, well, how much demand there'd be.

"So the oil price has dropped. And the big one for setting UK gas and electricity prices is the gas price. And the gas price has dropped too.

"Why does that set electricity prices? Because the way our pricing system works means much of our electricity pricing is based on the wholesale rate – the rate gas and electricity firms pay – for gas. So that is the big picture."

There are two types of energy bill: the Price Cap and fixed or special deals

Martin: "How does that practically affect the price that you pay for home energy? Well, in a nutshell, there are two different types of home energy bill:

1. "The first is the Energy Price Cap. This is the regulated tariff set by [regulator] Ofgem that dictates the maximum standing charge and unit rate that energy providers are allowed to charge on their standard tariffs – the bog-standard default tariff, the 'I've not done anything' [so] that's the one you're on.
   
   And that affects two-thirds of homes in England, Scotland, and Wales. Northern Ireland doesn't have an Energy Price Cap.

2. "The other type of deal are fixed rates and special deals, which are much more of a market-based situation."

The Price Cap is expected to come down in July, but not by much

Martin: "So let's take these in turn. The big one is the Price Cap; that affects more homes. Now, the Energy Price Cap, there's lots of fixed factors, but the big variable factors are wholesale energy rates – the price that energy firms pay for gas and electricity – and they have dropped substantially on the back of the Trump effect.

"In fact, if you look at the graph, and this is a graph many people are sending me, that currently from the absolute peak we saw in February, well, they're down let's say 40% right now.

"Now, I say the Trump effect, some of that initially was due to the hope for peace in Ukraine. And then there was the idea that Russian gas supply might be turned on that would bring down gas competition. And then more recently, it's been the tariff effect that's brought those prices down. So it's a combination of both in reality.

"But I'm afraid that doesn't mean our energy prices are coming down 40%, because this isn't about comparing peak to trough.

"The Energy Price Cap is based on a three-month average of wholesale rates and a whole load of other factors in, but the big variable one is the wholesale rates. And it's based on a time-lagged three-month average.

"So, the April Price Cap, which is the one we're currently on, was based on wholesale rates from November to February. And the July Price Cap, the one we're going to, is based on wholesale rates from the middle of February, it actually is, to the middle of May.

"Now, that peak you saw – in November to February, we saw prices going up, and then you had that peak at the end, but the average price of that period was much lower. So, even though energy prices went up, it's not based on the very peak, it's based on the average.

"Since then, we've seen prices come down and they're currently down about 40% from that peak. But the average price, well, it isn't down that much lower than the average before. In fact, the current predictions are we will see a fall of 6% to 8% in the Price Cap in July.

"Now, if you think about that, the Price Cap went up 6.4% in April. It's currently predicted to come down 6% to 8% in July. So it'll be slightly cheaper than where we were before it went up, just at the end of March. That's what we're expecting to see. And 1% or 2% of that is likely because of the Trump effect."

It's too soon to say whether the Price Cap could decrease further in October

Martin: "Now, if things continue to go down, and the predictions for the worldwide economy worsen, we could see the prices dropping even further. But remember, because it's a three-month average from February to May that dictates the July Price Cap, even if it drops a lot now, you've already got nearly two months' worth of data in. It won't have the profound effect you'd think it will.

"If prices continue to stay low, then it would be the October Price Cap, and the following January Price Cap that would be lower. Now, currently, it is predicted that we'll see another drop of about 3% in October, and then it'll stay about the same in January. But that's really crystal ball gazing.

"So those graphs you're seeing of the wholesale rates coming down rapidly from peak to trough, I'm afraid the way the system works will not play into huge cuts into the Price Cap on energy bills."

Fixed rates haven't dropped much due to lack of competition in the energy market

Martin: "Let's move on to the second type of tariff – fixed rates or special tariffs.

"Now they're much more market-based. In simple terms, the rate an energy provider can set a fix at means it goes out into the market, it says, 'I want to buy this many people's gas or electricity supply at this price, locked in for the next year' type thing. And so it buys a certain amount. And then those fixes are available until it sells out. And then if the market price is moved up or down, the next fix will be up or down on the back of it.

"So wholesale rates having dropped means we should be expecting to see fixed rates, the rate at which you can fix at, being cheaper. And indeed they are, but only slightly cheaper. You know, the current cheapest fix is about 16% less than the current Price Cap. A few weeks ago it was about 13% or 14% less. So there's been a little bit of shifting because, of course, the rate that they set fixes at is not just due to what they can buy out, it's also due to how much profit they want to make and the competitiveness of the market.

"So while you can fix a little bit cheaper, and we've seen the differential between the Price Cap and what you can fix at drop, they've not dropped that substantially. Partly because our market is not that competitive. All those firms went bust. We've now got an oligopoly – which is like a monopoly but with a number of different firms – where all these firms have big customer bases, they've locked in, they’re on the Price Cap, they continue to take in the money on the Price Cap. And that's got a timeline, so that's not going to be moving any time soon.

"And if they offer really, really cheap fixes, many of their existing customers will be paying less and they may not necessarily want that to happen. We do not have enough competition in our marketplace to really drive down the prices at this moment."

If you're on the Price Cap, it's still worth considering a fix

Martin: "But there are still, on the back of that, it is worth saying, you can still fix now far less than you will pay on the Price Cap, and less than the Price Cap is predicted to drop. So if the predictions are right, you would be far better going onto MoneySavingExpert's Cheap Energy Club comparison and locking in a fix. But there is an 'if' on predictions; things could change even more. So just have a look at the early exit penalties if you do fix.

"So I hope that gives you a little bit of an idea of what's going on in the market. I know it'll be disappointing to many people because those graphs have been going about and people think it's going to make a radical difference. It will bring prices down, but it ain't going to be bringing them down a lot—not unless something far more drastic happens. Sorry to be the bearer of bad news."