Record gas price to drive up UK energy bills

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UK consumers and businesses are set for another steep rise in energy bills after the wholesale price of gas hit a record on Monday, driven up by the soaring cost of oil.

The price of gas for next winter rose above £1 per therm for the first time in the futures market, more than double last winter’s average of about 48p per therm.

The rising gas price has also sent the price of electricity for next winter up to £88.25 per megawatt hour, up from an average of about £50 last winter.

Industry executives believe it is certain ,retail energy prices will rise, with some suggesting increases of more than 20 per cent,.

Rising retail prices will add to the upward pressure on inflation. An 18 per cent increase would add 0.6 percentage points to the rate of consumer price inflation, which was 3 per cent in April. The government’s target is 2 per cent.

The gas market in Britain has become ever more tightly linked to the continental market, as domestic production from the North Sea has declined. In 2003, the UK was a net exporter of gas; this year, it is likely to have to import almost 40 per cent of its needs.

That means UK prices have to be high enough to attract gas from the continent through the pipelines from Belgium and the Netherlands, or from Norway, where gas producers have the option of selling into either the UK or other European markets.

In effect, a floor is set under the UK gas price by the continental price, which in turn is largely determined by the price of oil, because most gas in Europe is sold on long-term contracts at prices linked to oil and oil products. Oil hit a record of more than $139 a barrel for US crude on Monday.

The rise in wholesale gas prices meant that it was now “inevitable” ,energy bills would be increased, “barring a massive plunge in oil prices”, said one big energy supplier.

“It is not just the scale of the increase, it is the speed with which it is happening. The whole industry is going to be impacted.”

He said if wholesale gas prices remained this high next winter and bills were not put up, energy companies would be losing money on their residential supply businesses.

Last month, Sam Laidlaw, the chief executive of Centrica, owner of British Gas, warned that this year’s profitability for the group was likely to fall short of last year’s “exceptional” level.

The size and speed of the increases will depend on how successfully each company has hedged its exposure to wholesale prices, and whether they secured supplies of gas for next winter early. Energy companies could raise their bills as early as next month, although August and September are seen as the most likely months for announcements of new tariffs.

The UK’s six main energy suppliers all declined to comment on Monday on the prospect of higher bills.

Centrica said: “We continue to monitor the wholesale market. It is something we keep a close watch on.”

Scottish and Southern Energy, the UK’s second largest energy supplier after Centrica, said: “Everything is speculative at the moment. If there are to be any increases, we would seek to be the last to increase.”

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