A new energy shock could trap UK households in a cycle of debt

“The Iran war risks triggering a new energy crisis. Erhan Kilincarslan and Giray Gozgor argue that despite some positive short term interventions by the Government, the long term picture for British households looks bleak. Energy price caps merely delay the problem, rather than solve it. Enjoying this post? Then sign up to our newsletter and receive a weekly roundup of all our articles. Millions of UK households are still paying off energy debts from the last crisis. Now a fresh geopolitical shock risks pushing them into something more persistent: a cycle of debt that becomes harder to escape with each new price rise. Wholesale gas prices have surged as markets react to disruption in the Middle East, raising fears of another global energy price shock. Although the UK imports relatively little energy directly from the region, global fuel markets mean the country is still exposed to rising costs. For many households, the consequences may not appear immediately. But if wholesale prices remain high, the next adjustment to the UK’s energy price cap could push bills up again later this year. Recent government measures may offer some short-term relief. The government has postponed a planned 5p fuel duty increase , while energy support measures helped push inflation slightly lower in May. But these interventions ease immediate pressure rather than removing the underlying exposure of UK households to volatile global energy markets. That would come at a difficult moment. Energy suppliers are already warning that household debt remains historically high. One of Britain’s largest suppliers, EDF, recently said one in eight of its customers is more than 45 days behind on energy payments , even before the latest rise in wholesale prices feeds through to consumer bills. The risk is that another price shock could reinforce a growing “energy debt trap”, leaving vulnerable households struggling to repay arrears accumulated during successive crises. Why global conflicts affect UK energy bills The latest surge in energy prices reflects the strategic importance of the Middle East in global energy markets. The region hosts major oil and gas infrastructure and key shipping routes, including the Strait of Hormuz, through which roughly a fifth of the world’s oil supply passes. Energy suppliers are already warning that household debt remains historically high. Even the threat of disruption can push prices higher. Energy markets typically operate with limited spare capacity, meaning geopolitical instability can rapidly tighten global supply. Gas markets have responded quickly. European wholesale gas prices jumped sharply after the escalation of the conflict as traders priced in the possibility of supply disruptions and increased competition for liquefied natural gas (LNG) shipments. Because gas remains a major fuel for both heating homes and generating electricity in the UK, rising global prices quickly translate into higher domestic energy costs. Households are still dealing with the last crisis The timing of this price shock is significant. Many households are still struggling with the financial consequences of the last energy crisis , triggered by Russia’s invasion of Ukraine in 2022. That crisis drove energy bills to unprecedented levels and forced millions of households to make difficult choices about heating and spending. Many fell behind on payments. According to the UK energy regulator Ofgem, household energy debt has since reached record levels, with more than £4 billion owed to energy suppliers across the country. Research on energy vulnerability shows that once households fall behind on energy bills, the financial effects can persist long after prices stabilise. Arrears are typically repaid gradually through instalment plans that are added to future bills. This means households often face the combined burden of current energy costs and past debts at the same time, creating years of financial pressure even after prices fall. The emerging “energy debt trap” When energy prices rise sharply, financially vulnerable households may struggle to keep up with payments. They accumulate arrears and agree repayment plans with suppliers. But those repayments are usually added on top of ongoing bills, meaning new price increases can arrive before old debts have been cleared. The wider energy system can also amplify this cycle. Suppliers are permitted to recover the costs of unpaid bills through tariffs, meaning that bad debt in the system is partly spread across all customers. Industry estimates suggest that households are already paying around £50 a year on average through higher bills to cover the cost of energy debt. The price cap delay effect In the UK, most households are protected by Ofgem’s energy price cap , which limits how much suppliers can charge customers on standard variable tariffs. The cap plays an important role in protecting consumers from sudden price spikes. But it does not eliminate the effects of rising wholesale costs. Instead, it delays them. The price cap is updated periodically to reflect changes in energy markets. This means global price shocks often appear in household bills several months after they occur . The cap plays an important role in protecting consumers from sudden price spikes. But it does not eliminate the effects of rising wholesale costs. Instead, it delays them. The delay can create a false sense of security. Households may not immediately feel the impact of rising wholesale prices, but if those prices remain high, the cap eventually increases and bills rise accordingly. Meanwhile, suppliers must respond to market volatility immediately. Recent developments in the retail market illustrate this tension. As wholesale prices surged, energy suppliers began withdrawing or repricing fixed-price tariffs because the uncertainty made long-term price guarantees difficult. Within days, the number of fixed deals available to consumers reportedly dropped sharply. Such moves highlight how quickly global market shocks ripple through the energy system, even if households only feel the effects later. A deeper structural problem These developments also highlight a longer-term challenge in the UK’s energy system: its continued exposure to volatile global gas markets. Gas still plays a central role in British energy supply, providing the majority of home heating and a substantial share of electricity generation. This reliance means geopolitical events far from the UK can quickly translate into higher energy bills at home. Research on energy security and energy justice suggests that resilient energy systems should protect households not only from carbon emissions but also from price volatility and geopolitical risk. Policies such as improving home insulation, expanding renewable electricity and reducing dependence on gas heating could help reduce this vulnerability over time. But such transitions take years. The risk of repeating the last crisis For now, the more immediate concern is that the UK may be entering another period of energy price instability before households have fully recovered from the previous one. If wholesale prices remain elevated and the energy price cap rises again later this year, millions of households could face higher bills while still repaying debts accumulated during the last crisis. Recent falls in inflation and government support measures may suggest the immediate pressure is easing. But as Martin Wolf has argued, the deeper energy challenge may only be beginning. The real danger is not simply another isolated price spike, but a system in which each new shock arrives before households have recovered from the last – turning temporary crises into a persistent cycle of energy debt. Enjoyed this post? Sign up to our newsletter and receive a weekly roundup of all our articles. All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Image credit : Monkey Business Images on Shutterstock The post A new energy shock could trap UK households in a cycle of debt first appeared on LSE British Politics .

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