From: Life's a Gas PLC

Dear Valued Customer,

The winter of your discontent is upon you! As you may be aware, world energy prices have continued to increase significantly over recent months and still remain extremely volatile. Our costs in supplying your needs are rocketing - so we are passing them on to you. From this week, your gas bill is going up by 15pc, and your electricity by 10pc. Still, do not be so sad and glum, there's bound to be far worse to come.

Yours sincerely,

Vincent de Golby, chief executive

Malcolm Moore explains why customers are well-advised to fix costs for gas and electricity with the prospect of higher bills this winter.

Letters like this dropped onto hundreds of thousands of door mats last week. If you haven't had one yet, you soon will.

Powergen and EDF have kicked off the latest round of price rises and other power companies - as soon as their chief executives return from their summer holidays - are certain to follow suit.

In the past 18 months, fuel bills have gone up by 20pc on average for households and 40pc for businesses. A typical family of four has had an annual £106 rise in their gas bill and a £74 rise for the juice. Now, as the peak winter season approaches, higher prices are starting to bite. Manufacturers are choosing which factories to shut down and the NHS will be stocking up on blankets. Last year its fuel bill rose 57pc, or £41m.

Staffordshire County Council has even hired a new employee to walk around in the evening to tell everyone to turn off their lights and computers, while Milton Keynes' council has threatened to turn off street lights. Street light bills across the country have gone up by 44pc on average, according to Energywatch, the consumers group.

A dark future ahead?

The outlook is gloomy. The power companies say they are taking a hit on their retail sales even after raising prices. Wholesale electricity prices are now 80pc higher than they were last year.

The main culprit is high oil prices. Oil and gas come out of the ground hand-in-hand, leading directly to high electricity prices, since over 40pc of our power stations now burn gas.

Supplies of gas from the North Sea are dwindling. Production fell by 8pc last year, according to Broadfern, an energy consultancy. Meanwhile, the state-owned European power monopolies snap up the majority of the gas coming from Russia, and even then France and Italy had to cut off supplies last winter.

So once again, speculators are betting there will not be enough gas around for winter. Hedge funds are lurking, attracted by the volatility in the market, and prices are sky-high. Last month contracts for gas over the winter were being exchanged at prices of over £1 a therm, compared with the 35p-a-therm or so that they fetched at the same time last year.

Then there is Carbon-gate. European power generators are now trading carbon quotas, which allow them to pump a certain number of tons of CO2 into the air every year.

UBS, the investment bank, says the cost of buying carbon credits has added 55pc to the operating costs of a coal-fired power station. EDF says it has added 12pc to its costs when it buys wholesale electricity. Despite this, economists say the price of the credits, which were issued in abundance, are not high enough to provide any real incentive for generators to burn cleaner fuels.

Dan Lewis, who edited a pamphlet on whether to build new coal, gas or nuclear power stations for the Economic Research Council, says: "If one wants to reduce prices in the next couple of years, the easiest way would be to suspend carbon trading, because that is inflating prices artificially and it is not achieving its intended effect."

Finally, let's not forget to blame the Government, which has lashed the electricity sector to a grid of meddlesome regulations. Until the Department of Time-wasting and Incompetence decides on what mix of coal, gas and nuclear it wants for the future, and what incentives and punishments it will offer, it is impossible for companies to make any investment in power stations.

What can be done?

Chris Cragg, a former editor of the Financial Times Energy Economist, says that since the current nuclear fleet took around 10 years to build, "It is no exaggeration to say that, in the current, risk-averse investment climate, for a company to look for private investment bank funding for 10 nuclear plants with no possibility of making any return for say, six to seven years would require considerable nerve".

He estimates that the cost of 10 gigawatts of new capacity would run to £13billion, borrowed over 20 years. Even the equivalent capacity of gas-fired stations would cost just under £3billion. Instead, companies have diversified into credit cards or insurance.

Dr Dieter Helm, a fellow of economics at New College, Oxford, notes that as power stations aged, "and new investment slowed down, the capacity margin tightened. The result was predictable: electricity prices fell in 1998 by 40pc and then went back up by 40pc after 2003."

Still, if you look beyond the gloom and out to sea, you may see the silhouettes of giant gas tankers sailing into view. At the beginning of last month, the first shipment of Liquefied Natural Gas (LNG) pulled into the Thames estuary and docked at the Isle of Grain.

LNG, which is cooled and compressed methane, will soon be arriving from Algeria, Eygpt and Qatar, into three new enormous terminals.

Unlike the slow-moving power companies, oil and gas companies have the cash, and the chutzpah, to make billion-pound investments to fill the supply gap in the market.

BP, Exxon and BG have all shelled out, while the Norwegians and the Russians are busy laying pipelines. The Langeled line from Norway will be the longest underwater pipeline in the world and will pump the equivalent of Norway's entire annual gas consumption into the UK market.

Cragg says there will be such a glut of gas that the UK could start pumping the stuff across La Manche. "Maritime Britain may well become a key part of the seaborne gas trade into Europe," he says. He believes the new supplies will arrive at the rate of between 2.1trillion and 3.4trillion cubic feet a year between now and 2012.

Nevertheless, customers are likely to be shocked at their bills this winter, and wise readers would take our repeated advice to fix their gas and electricity prices for the next two years. When those frozen deals melt, the landscape should be much rosier.

Sources: http://www.telegraph.co.uk

Find out if you can save money on your Household Energy prices.

For savings on your Business Energy see our Business Electricity and Business Gas pages.

Go Back to Utilities News >>