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Last Updated: Tuesday, 24 October 2006, 23:08 GMT 00:08 UK
When will fuel bills drop?
By Ian Pollock
Personal finance reporter, BBC News

The UK will be swamped by a "wall of gas" that will drive down gas and electricity prices by as much as 40% - but not yet.

Acergy Piper pipe laying vessel
Laying the new underwater gas pipe from Norway

That is the prediction from one energy industry consultant looking ahead to 2009.

A huge increase in gas pipeline and storage capacity is scheduled to come on stream over the next three years.

And Patrick Heren of the European consultancy Heren Energy says: "On paper it seems there will be so much gas coming into northern Europe the price will collapse."

Millions of people will hope he is right.

The huge increase in domestic energy bills seen over the last three years has pushed a further two million households into "fuel poverty" - spending 10% or more of their disposable income on energy.

The government estimates about 3.7 million UK households are now in this situation.

Rising bills

In the past year nothing has gone up faster than our energy costs.

Graphic showing how fuel bills have risen

In the 12 months to August 2006 the retail prices index went up by just 3.3%.

But the cost of electricity rose by 27% and gas by a whopping 38%.

The next biggest increase was for fish, at a mere 11%.

Energywatch calculates that the combined gas and electricity bill for a typical household now stands at more than 1,000 - having almost doubled since January 2003.

The financial pain has been piled on relentlessly with each of the big six energy companies putting up prices at least twice this year.

Npower has implemented three rises and SSE has announced a third increase to come into effect this coming January.

Bursting bubble?

However, there are the first signs of movement in the other direction.

Map of pipeline
The new pipeline from Norway will bring in 20% of the UK's gas

Tuesday 3 October 2006 saw a great oddity: the wholesale price of gas for immediate delivery suddenly collapsed, and even became negative.

Gas traders were apparently willing to pay people to take the gas off their hands.

It was a temporary reaction to the opening of the new Langeled pipeline that is now shipping Norwegian gas directly to the UK.

But it shows how the balance of supply and demand has changed in the last six months or so.

Back in March, on Monday 13th to be exact, the National Grid issued an official warning that there might not be enough gas to meet demand.

In the event there was just enough. Since then, the capacity of the UK to import and store more gas has increased substantially.

  • The new pipeline from Norway is now importing gas after two years in construction, and may provide 20% of the UK's imports in the coming years
  • The existing Interconnector pipeline from Zeebrugge to Bacton on the Norfolk coast was expanded for the second time in two years
  • The Rough gas storage facility, an old gas field 9,000 feet under the seabed off the Yorkshire coast that provides the UK with its single largest store of gas, has re-opened after a fire and is now nearly full
  • A new pipeline from Holland to Bacton should open this December and a terminal for offloading liquefied natural gas (LNG) from tankers should open on Teesside in January 2007

Supply and demand

Taking all these things together, along with a variety of other LNG storage projects that have still to come to fruition, the energy regulator Ofgem predicts that the UK will, in the next couple of years, have doubled its capacity to import gas.

Boy riding a sledge in the snow
Cold weather can affect demand and therefore prices

It seems the change in the balance of supply and demand is, at least for the time being, driving down the wholesale price of gas.

In November 2005 the price of gas, for delivery in one month's time, peaked at 117 pence per therm.

It has drifted down since then, with a few blips on the way, and is now around 50 pence per therm.

The prices quoted on the International Petroleum Exchange in London suggest the wholesale price will rise again over the winter - and will in fact be higher than at the start of this year - before falling again in the spring.

Nigel Cornwall of energy consultants Cornwall Energy said: "The market is a lot more relaxed, the general feeling is we should have an easier time than last winter."

Surely this should all mean that gas and electricity prices for you and me will soon start falling? Not quite.

Wholesale costs

The big gas and electricity suppliers (gas fired power stations can generate 40% of our electricity) largely buy their gas in bulk on the wholesale markets to guarantee supplies for themselves.

They now have a lot of gas to sell which they bought at high prices.

On the face of it this means they cannot cut their retail prices yet without suffering a big loss.

And the companies say they have to recover losses they suffered by not fully passing on the rising wholesale cost during the past three years.

"In the first half of 2006 British Gas reported record losses of 143 million, those losses are unsustainable if we are to continue investing and securing supply for the UK," said a spokesman for Centrica, owners of British Gas.

Analyst Patrick Heren explains: "They didn't raise prices at the drop of a hat so they will leave prices high until they recoup some of the money they lost before".

Other factors will be at play too, making a jigsaw the final shape of which is hard to predict.

The price of gas imported from the continent is linked to the price of oil, which peaked at $78 a barrel in August but has since subsided to just under $60 a barrel.

However the market for crude oil gas been very volatile and the price could easily rise again.

Meanwhile the weather this winter will also affect demand. The Met office is suggesting that the end of this coming winter may be colder than usual.

When will prices fall?

The regulator Ofgem reckons that retail prices generally lag wholesale ones by six to 12 months.

On that view it will probably not be until next spring at the earliest that domestic tariffs start to come down.

Ofgem has said recently that it will be watching the behaviour of the energy suppliers closely.

For its part Energywatch reckons that domestic prices will probably drift down next year rather than collapsing.

And if they do not? A spokesman for Ofgem repeated its recent threat.

"Should we see a substantial fall in wholesale prices and no movement in retail prices we could fine them 10% of their global turnover," he said.

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