British Gas has launched a new domestic energy tariff that will track wholesale prices over the next 12 months and reflect market changes in customers' bills.

In the same way that tracker mortgages are linked to the Bank of England base rate, the new product will follow changes in the Heren index of wholesale gas and electricity prices.

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Changes in the wholesale Electricity and Gas markets are now being reflected sooner in domestic customers' bills.

Customers who take out the product will have their bills reviewed every quarter in line with movements in commodity prices. Traditionally, energy price adjustments are smoothed over a period of time to protect customers from volatility, although this kind of product has been available in the business market for a short time. 

Total Gas & Power are one business utilities supplier who now offer different types of tracker products for large gas supplies, even allowing customers to secure up to 80% of their consumption at a fixed price, and track wholesale markets for their remaining usage.  This means that risk is reduced, but customers can still take advantage of any sudden drops in wholesale gas prices.

On their new tracker offer, Phil Bentley of British Gas said: "This new product is for those people who understand and accept the risk that their bills could move up or down far more frequently."

"As the mortgage market has successfully done, we now have a product to match the risk portfolio for all customers."

The tracker, initially offered for a year, will begin to follow wholesale prices on September 1.  Prices charged to consumers will be set at the beginning of each quarter -- on December 4, March 4 and June 3 -- and fixed for the rest of that three-month period.

They will be based on an average published price during the first 15 trading days of the month before the review date.  Prices will only change if movements in the wholesale price mean that the average customer's annual electricity or gas bill will rise or fall by more than 5 pounds.

However, with wholesale energy prices predicted to be on the way up, price comparison service uSwitch.com said the product should be treated with some caution.

Energy manager Geoff Slaughter said: "It is an interesting and innovative product, but with wholesale energy prices predicted to be on the way up, this new energy plan needs a 'buyer beware' stamp on it.

"It will only be suitable for a very special type of consumer, who is completely comfortable with the idea that their energy bills could go up as well as down on a far more frequent basis."

Npower launched a similar product in January, but it has attracted only 3,500 customers despite saying it would offer it to the first 10,000 applicants. The product is now closed to new customers.

Even though prices were set at the standard Npower tariff in January, the first adjustment was made in April. Prices fell by 4.7% for gas and 10% for electricity during the April to June quarter. However, for June to August, prices have increased. Tracker customers are paying, on average, 2% more than in January for gas, and 1.3% more for electricity.

The telegraph's personal finance editor, Ian Cowie had this to say of the new tracker product:

Fuel for thought

The traditional advice for anyone tempted to bet on commodity prices is to lie down in a dark room and wait for the feeling to go away.

These markets are notoriously volatile and it is easy to get your fingers burned. So today's offer by British Gas to let millions of customers peg their bills directly to wholesale gas and electricity prices should be regarded with some caution.

But the energy giant also deserves praise for offering customers more transparency about how it calculates bills. Criticism of all the fuel suppliers that what we have to pay to heat and light our homes bears little relation to wholesale prices has been neatly snuffed out.

Managing director Phil Bentley explained that wholesale gas prices currently comprise only 51 per cent of what customers are charged – and the relevant proportion for electricity is just 41 per cent – with fixed costs, such as metering, billing and transportation making up the rest.

So, for example, a 10 per cent drop in wholesale prices would mean a 5 per cent cut in customers' monthly bills. It has taken some suppliers nearly a year to pass on lower costs, despite wholesale prices falling sharply during the last 12 months.

That trend also raises questions about whether this is the right time to switch to a tracker – although British Gas says customers will be free to revert to variable or fixed billing at any time in the new offer's first year, which begins in September.

Here and now, most domestic customers could cut costs immediately by switching to paying for their fuel by direct debit and opting for an online account.

All things considered, the tracker deals are an interesting extension of customer choice coupled with the risk that, if prices rise sharply, you might end up not just in a dark room but a cold one too.

If you think a 'Market Tracker' product could be right for your business, or are just confused by changes in the wholesale markets, talk to a utilities consultant now.  Either Contact Us or Request a Call Back.

Sources: http://uk.reuters.com/ | http://business.timesonline.co.uk/ | http://www.telegraph.co.uk/money

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