Wholesale gas and electricity prices fall

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UK winter wholesale gas prices have fallen by a quarter in the past four months – and electricity prices by 30 per cent for the same period – putting the pressure on utilities who have put up bills to start planning price cuts for next year.

The country’s largest utilities, including British Gas, Powergen and npower, have raised their customers’ bills twice this year, blaming higher gas costs. Last week npower said it would be imposing a third increase on October 1, raising gas bills by 17.2 per cent and electricity bills by 9.9 per cent.

Ofgem, the regulator, said there was generally a time lag of up to nine months before a rise or fall in wholesale prices was passed on to the consumer. This is in contrast to oil companies, who set retail petrol prices in line with the world oil price.

Business customers generally negotiate their energy supply contracts with utilities each year. So only those beginning the negotiations now are likely to benefit from the price falls. Many business customers may find they are locked into higher-priced contracts.

The planned opening this week of the Langeled pipeline from Norway to Easington in Yorkshire is the first in a string of new import projects that will boost gas supplies to Britain this winter and may put pressure on prices to fall further.

Furthermore, meteorologists at investment banks are forecasting that this winter is likely to be milder than the last. The Met Office said early indications suggested temperatures this winter would be milder than normal, with the winter dominated by westerly rather than easterly winds, based on a statistical analysis of the patterns of sea surface temperatures in the North Atlantic Ocean in spring.

The Langeled pipeline is expected to pump 30m cubic metres of gas each day when it starts, rising to its full capacity of 70m cm/d next year. The completion in December of the BBL pipeline from the Netherlands, and the expansion of the gas interconnector with Belgium, means the UK should have more gas supplies than it did last winter.

The expected net increase in gas supplies equates to about a fifth of UK peak gas demand of 44m cm/d in the coldest days of winter.

At the same time, the Rough gas storage facility is expected to be back on stream in October after an explosion caused its shutdown earlier in the year.

These factors have helped drag winter gas prices down from 88p a therm in May to 66p at present, and some traders expect the prices to fall further.

The current price is still above the average gas price between October 2005 and March 2006 of 60p a therm, a period that also included the jump to a record 256p after the unexpected cold snap in March.

“One of the reason [the utilities] will not lower their prices is that they got in a panic earlier this year and started buying forward with gas for this winter and it helped drive prices up,” said a gas trader who talked on the condition of anonymity.

“So they have taken a bet on higher prices and they want their customers to pay for their bet that has gone wrong.”

The fall in gas prices has also triggered a fall in UK electricity prices. Winter 2006 power prices have fallen from 72p per megawatt hour to 54p/MHW. About 40 per cent of the UK’s energy needs comes from gas-fired power stations.

Another factor on the decline in power prices is the drop in emissions prices. Carbon emission prices for December 2006 are trading at about €16.30 a tonne, or about half of their peak in April.

Additional reporting by Fiona Harvey

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