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Last Updated: Thursday, 29 December 2005, 07:46 GMT
Can you afford to keep warm in 2006?
By Ian Pollock
BBC News personal finance reporter

Ormen Lange (Hydro photo)
The Langeled pipeline will bring gas from the North Sea to Yorkshire

You have been warned.

Gas and electricity prices are going to go up even further next year.

The country's biggest gas supplier Centrica said so in December - and no one doubts that the company, which trades as British Gas and Scottish Gas, is right.

But some experts say this will turn out to be a short term problem and that prices may fall in 2007.

Wholesale prices

Once again Centrica blamed the prospect of ever-rising bills on the need to recover the continuing climb in the wholesale cost of gas, increasing amounts of which have to be bought and imported from abroad.

Wholesale costs have been rising since the autumn of 2003.

Since the start of 2004, gas bills from British Gas have now increased by 35%, with charges for its electricity customers not far behind.

So it's conceivable that further rounds of increases could see its customers dealing with a cumulative rise of 50% or more in less than three years.

As recent experience has shown, the same pressures which have driven up prices from British Gas will inevitably affect its energy supply rivals.

Some - Npower and Scottish & Southern - have already announced higher prices which will come into effect in January.

Prices staying high

The regulator, Ofgem, is pessimistic about the prospects of price coming back down.

These prices are unreasonably high and are not a reflection of a market that is working sensibly
Peter Lehmann, Fuel Poverty Advisory Group

"We would never crystal ball gaze," a spokesman told BBC News. "But prices are high and likely to remain so until investment in pipelines and storage and LNG come on stream in the next year or so."

However, the regulator was keen to stress that many consumers can cut their energy bills by switching supplier.

Anyone who has never switched their gas and electricity supplier can save 111 a year, the regulator added.

Overall, inflation stayed low in 2005, with the consumer price index (CPI) rising by just 2.1% in the year to November.

But within that, the cost of lighting and heating your home rocketed.

Electricity bills rose by 12%, gas bills by 17%, and if you heat your house with an oil-fired boiler then your bills will have risen by a whopping 24%.

How much is that actually costing you?

If you are in an average household, then your annual gas and electricity bill will soon amount to 780 a year, according to the watchdog Energywatch.

Fuel poverty

Given all this, it is not surprising that more and more people are struggling to pay.

Thanks to the rising cost of energy, the government's target of eradicating by 2010 fuel poverty among the vulnerable - the elderly, households with children, or with people who are sick or disabled - has been blown way off course.

What is called "fuel poverty" is defined as someone who has to spend at least 10% of their take-home income paying for energy.

Figures published in July 2005 by the Department of Trade & Industry suggested that the energy price increases experienced between 2003 and the end of 2005 will push an extra 400,000 households into fuel poverty by the end of 2006.

If energy prices rise by another 10%, then the number of English households spending more than a tenth of their incomes just to keep warm will rise by a further 400,000 to 2 million.

Old man by his gas fire
Many more will count the cost of keeping warm this year

That would be around 10% of the English population.

Peter Lehmann, chairman of the Fuel Poverty Advisory Group, called on the government to try to get prices down, especially for those on low incomes.

"These prices are unreasonably high and are not a reflection of a market that is working sensibly," he said.

Get ready for a glut

The big question, therefore, is how much further domestic gas and electricity bills are likely to rise.

"We may well see one more round of increases, of the order of 5-10%, sustained for 12 months, but not much beyond that," says Patrick Heren of Heren Energy, which analyses the wholesale energy markets in Europe.

The reason is that from 2007 onwards, current plans see the UK receiving a massive increase in its imports of gas:

  • Three new import terminals for LNG (liquified natural gas) imported by tanker - two at Milford Haven and one at the Isle of Grain in Kent.

  • A doubling of the capacity of the interconnector pipeline which transports gas from Zeebrugge in Belgium to Bacton in Norfolk, after it was doubled in size in 2005.

  • A new undersea gas pipeline which will pump gas from the Norwegian North Sea to the Yorkshire coast by the end of 2006.

  • Another new gas pipeline coming ashore at Bacton, this time from Holland.

"What that adds up to is a glut," says Mr Heren.

"From 2007 to 2012 we are looking at a very different, low cost, easy supply environment."

As a result, gas bills should fall. And they should drag down domestic electricity bills too.

No end in sight?

But not everyone agrees.

"Even when investment has been made, prices have been generally resistant," argues Nigel Cornwall of Cornwall Energy Associates.

In addition, gas suppliers claim they have yet to pass on the full cost of higher wholesale prices.

So if those come down, they may try to recoup some of their "lost" profits.

Meanwhile hard winters or even higher oil prices - which currently drive the price of gas imported from Europe - could also keep domestic prices up.

An additional fact is that life is just not as simple as it was when most of our oil and gas was coming from the North Sea, and supply and demand was predictable.

Those North Sea supplies have been dwindling more rapidly than expected.

And that means the supply of gas coming into the UK is now much more at the mercy of an international market encompassing not just Europe but Russia, North Africa and further afield.

Other countries such as Italy or Spain could simply outbid us for supplies of LNG or even natural gas, with supplies flowing back through the interconnector to Europe.

The complexities are awesome, Nigel Cornwall says.

Which means if you're hoping for respite from expensive energy, you'd be well advised not to hold your breath.

SEE ALSO
Centrica warns gas bills to rise
16 Dec 05 |  Business
High gas price risks fuel poverty
13 Dec 05 |  Business
Coal 'could ease energy crisis'
29 Nov 05 |  England
Ofgem demands EU gas supply probe
28 Nov 05 |  Business
EU threatens action on gas prices
15 Nov 05 |  Business

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