UK Faces Energy 'Risk Premium' as US-Israel-Iran War Escalates

UK energy regulator Ofgem announced on August 31 a 4% increase in the energy price cap for consumers in England, Wales, and Scotland, effective October 1, 2026, citing sharp rises in wholesale gas prices following the US-Israel military campaign against Iran.

According to Ofgem, a typical household using average energy will pay about £60 (USD 80) more per year. The move comes as the UK continues to grapple with a prolonged cost-of-living crisis.

Andrew, a 70-year-old retiree in Norwich, eastern England, said he had signed up for a fixed-rate energy package 18 months earlier, anticipating volatility from ongoing wars. “I guess I saw this coming,” he told Al Jazeera.

Ofgem noted that around 35% of households in England, Wales, and Scotland are on similar fixed-rate deals and will not be immediately affected by the price cap rise. However, the majority will face higher bills this coming winter.

The UK government, alongside the cap increase, announced a tax cut on monthly electricity bills as part of efforts to shield citizens from the escalating economic impact of the Iran war as winter approaches. The tax reduction will remain in place through the end of the 2027 fiscal year.

Geopolitical Strains Weigh Heavily

Ahmed Tabaqchali, non-resident senior fellow at the Atlantic Council, said the tax cut gives households “a bit of breathing room” but does not address root causes. “We are not going to see a return to normalcy regarding the Strait of Hormuz. No matter how the US–Iran situation ends, the status quo has changed,” he said.

Before the Iran war, about one-fifth of the world’s oil and liquefied natural gas (LNG) passed through the Strait of Hormuz, the only waterway connecting the Gulf to the open ocean. Iran closed this strategic route shortly after the first US-Israel airstrikes on Tehran in late February, sparking a global energy crisis.

Wholesale energy prices in the UK have risen 11% over the past three months. Ofgem’s market director Neil Kenward stressed that “high international gas prices continue to push up UK energy costs.”

Jack Burt, a PhD researcher at Cambridge University studying new energy storage technologies, said consumers will pay a “risk premium” for energy supply. He noted that after Russia’s full-scale invasion of Ukraine in 2022, which sent UK monthly energy bills to record highs, the country shifted away from Russian pipeline gas and became more reliant on other LNG suppliers, mainly from the Middle East.

Ozan, a 20-year-old business owner in northeast London, said it is “increasingly difficult to absorb price rises” for small businesses. “In the end, customers are affected too, leading to less disposable income, which means less spending.”

Last week, the Centre for Economics and Business Research (CEBR) forecast that by the end of 2027, the average UK household’s real purchasing power will have fallen by £2,400 (USD 3,200) due to continued increases in essential goods prices.

Ofgem’s energy price cap will be reviewed again in January next year under its quarterly schedule. Experts predict further increases, painting a bleak picture for the UK energy sector.