Consumers and businesses face soaring energy prices

Consumers and businesses are facing the prospect of significant energy price hikes as gas prices soar on world markets and oil prices increase further. Oil briefly hit its highest level since 2008 on Monday, while wholesale gas prices rose a further 18 per cent and have more than doubled in the past week.

In a statement, the ESB – a major gas user in its electric plants – pointed out that the wholesale gas prices it faces had increased 16-fold over the past year, based on prices on Monday morning.

While the ESB did not comment on the impact on prices, some big business customers are already on notice from energy suppliers of significant increases – of 50 per cent and more according to sources – and big rises in gas and electricity bills for households are also now in prospect, unless wholesale prices quickly ease.

European governments, including Ireland, are to discuss the response to the energy crisis at a meeting of European Union leaders later this week. Bloomberg reported on Monday night that an EU plan to cut reliance on Russian gas by up to 80 per cent over the next year was under discussion. The EU is also putting forward optons to support consumers and businesses

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The Irish Government is likely to follow any EU agreement, with speculation of a mechanism to cut excise duty as well as increased direct support for households, especially those on fixed incomes and some supports for business. The extent of the measures are likely to require legislative changes here, likely to be managed via amendments to the Finance Act currently going through the Oireachtas.

Boycott

Discussions between the US and the EU on a possible boycott of Russian oil sent Brent oil prices to $139 (€128) a barrel on Monday morning, though it later eased to about $122. However, changes in the wholesale gas market were even more dramatic, with prices rising to €345 per megawatt hour in early trading, from €193 on Friday, before falling back to about €218.

Markets will be closely watching whether talks on a Russian energy boycott progress. German chancellor Olaf Scholz rejected the idea of boycotting Russian energy on Monday, saying Europe's energy security required Russian supplies. Reports suggest that the US may consider going ahead on its own to boycott Russian oil.

As well as higher oil prices knocking on to a sharp increase in petrol and diesel costs, the jump in gas prices – which were about €70-€80 per megawatt hour at the turn of the year – threatens big increases in gas and electricity bills for households and businesses. Some 57 per cent of Irish electricity is produced in gas-fired stations.

Stock markets came under pressure, though later bounced off their lows, with the pan-European Stoxx 600 index down 0.60 per cent. Germany’s DAX looked set to confirm a bear market after suffering a 20 per cent decline since its January high. In Dublin the ISEQ index ended down 1.7 per cent at 6744.33, with travel-related stocks – such as Dalata, Irish Continental and Ryanair – among the biggest losers.

Inflation

Higher energy prices, if sustained, will knock on to a big hike in inflation and damage the economic outlook by cutting spending power. Business, with contracts tied to wholesale prices, will be first cut, and sources say some are already on notice for big increases. Households also face much higher costs, with wholesale prices accounting for around 30 per cent of gas bills. Industry sources say significant increases are in prospect over the coming months, though the move out of the winter period may soften the immediate blow.

The sharp rise in energy prices and costs in areas such as food and metals have raised fears of a period of “stagflation” – lower growth and high inflation, last seen during the 1970s oil price shock. The interest rate on euro zone government bonds fell yesterday – due to expectations that ECB interest rate increases are again on hold. The Irish ten-year interest rate, which had risen to 0.9 per cent in mid-February, is now back at 0.7 per cent.– Additional reporting Reuters