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Last Updated: Tuesday, 14 March 2006, 17:19 GMT
Q&A: Pressure of higher gas prices
Worker at a gas terminal
Critics say the supply problem could get worse next year, not better
Higher consumer demand and supply fears have led to a sharp rise in wholesale gas prices.

There are fears that companies which are heavy gas users could be forced to cut back production or even temporarily close operations because of spiralling prices.

BBC News looks at the reasons for the price rise, the problems caused for British industry and what businesses are doing to cope with the situation.

Why have wholesale prices risen so sharply?

Wholesale gas prices quadrupled on Monday to a peak of 255 pence a therm and rose another 23% on Tuesday.

The continued cold weather has led to significantly increased demand for gas from domestic users.

With prices this high, some heavily energy-dependent firms could be forced to turn down or shut production
Sir Digby Jones, CBI director-general

Concerns over supply shortages - as domestic gas production falls and the UK becomes more reliant on imports - and lack of storage have also put upward pressure on prices.

The UK's main gas storage facility is currently closed after a fire, while suppliers across Europe have been accused of failing to pump enough gas through major pipelines or "interconnectors" from the continent.

The price rise prompted the National Grid to issue a warning about an imbalance between available supplies and demand.

The unprecedented warning was designed to alert firms about the likely impact of price rises and the need to consider taking remedial action.

What are the risks to business?

Energy costs account for a large chunk of many businesses' budgets.

For many large manufacturers and other industrial firms, expenditure on energy can be their single largest outlay.

Rising wholesale prices over the winter months have already put a strain on some companies' profitability.

Industry groups are now warning of the danger of a "gas emergency" in which large commercial users could find their supplies, in effect, rationed in an effort to ensure continued supplies to domestic customers.

Some fear this could have a severe impact on firms' operations.

"With prices this high, some heavily energy-dependent firms could be forced to turn down or shut production," Sir Digby Jones, director-general of the CBI has warned.

What can businesses do to cope?

With gas prices rising fast, businesses have a range of options.

Some will have back-up supplies of gas for use in any contingency.

On the other hand, firms can switch to alternative fuels such as oil and opt to sell any gas they are not using back to suppliers.

National Grid said it believed some businesses were now taking this step, which it is hoped will force prices down in the short term.

We strongly recommend that companies look at their contracts
Jonathan Elliott, Energyhelpline.com

However, Trade and Industry Minister Alan Johnson said not all firms would find it easy to switch to alternative fuels and acknowledged that "higher prices will have an impact" on some companies.

More radically, firms can choose to temporarily cut back or even suspend production to save costs.

Several firms, including building materials group Hanson and fertilizer producer Terra Nitrogen, are already thought to have done this.

Consumer groups said companies needed to make sure their gas supply agreements were competitive.

"We strongly recommend that companies look at their contracts to not only make sure they know when it's renewal time, but what notice they need to give if moving to a cheaper supplier," said Jonathan Elliott, business services director at Energyhelpline.com.

Is this a one-off problem?

Ministers have stressed that the UK has sufficient gas supplies to keep domestic and industrial users connected.

However, critics of the UK's energy policy have warned that the problem of ever-tightening supplies could get worse rather than better.

Half of Britain's gas will be imported by 2010, according to estimates.

Efforts are being made to increase storage facilities in order to allow increased imports of liquefied natural gas from the continent.

However, sceptics say the problem will not be addressed until the European energy market is deregulated and made more competitive.

They point out that gas prices are far lower in continental Europe, while pipelines between the continent and the UK are running below capacity.

"This problem is not going to go away, with eye-wateringly tight energy supplies expected next winter too," Sir Digby Jones added.


SEE ALSO:
UK gas prices soar on new warning
14 Mar 06 |  Business
Gas shortage sends prices soaring
13 Mar 06 |  Business
EU calls for joint energy policy
08 Mar 06 |  Business


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