Page last updated at 15:07 GMT, Wednesday, 30 July 2008 16:07 UK

Q&A: Energy prices

Energy bills
Why are gas and electricity prices going up again?

Once again the major energy suppliers are warning explicitly that the prices they charge will have to increase, with EDF and British Gas already having announced price rises.

The suppliers say they are simply having to pay more for gas on the wholesale gas markets and that they have no alternative but to pass on this rise to customers.

How far are energy prices going to rise?

A lot. Energy suppliers have running costs and overheads other than just gas.

According to figures supplied by the regulator Ofgem, wholesale gas prices are currently expected to double from 50p per therm now, to 100p per therm in the first quarter of next year.

Wholesale prices are always higher in the winter anyway. But the significant thing is that they will be more than double their level seen at the start of this year.

And this will be about 20% more than when wholesale gas prices peaked at the start of 2006.

Why does the price of gas affect my electricity bill?

Gas-fired power stations produce more than a third of the UK's electricity, so there is a direct link.

Coal is also costing more and various polices to stop climate change, such as the EU emissions trading scheme, are also raising the industry's costs.

So why exactly is gas costing more?

With North Sea oil and gas production declining in the past few years, the UK has had to import more from elsewhere, particularly continental Europe.

However, the energy industry there is different from that of the UK.

The same big firms are responsible for buying, transporting and selling gas, both on the wholesale market and to residential and business customers.

Traditionally the cost of gas has been linked to the price of oil. And with the price of oil having been driven to new highs, so the cost of gas has gone up too.

Is there nothing that can be done?

Various authorities have been taking a close interest in the energy sector over the past year or two.

There is little real competition in the European energy industry, apart from in the UK.

This is why household gas and electricity in the UK may still be among the cheapest in Europe.

The UK regulator Ofgem also suspects that long-standing contractual arrangements among continental gas firms mean that even when demand is high here, such as in the winter, they are unwilling to turn on the taps and divert extra supplies to the UK.

The watchdog Energywatch has been complaining loudly about this for a long time and wants the regulators both here and abroad to break the apparent link between oil and gas prices.

The MPs on the Business and Enterprise Select Committee have taken up the same theme, demanding urgent action.

Why doesn't the government regulate energy prices and force them down?

The government does not believe in the state regulation of prices and has pinned its hope on competition to keep prices down, as has the regulator Ofgem.

It is clear though that the energy market is not working in the way that some of these authorities think it should.

That is why Ofgem started a formal investigation earlier this year.

Meanwhile other energy regulators in north-west Europe have been getting together and demanding much more information from European energy firms about their gas flows and network capacity, in order to shed some light on the opaque workings of this huge industry.

And the European Commission also wants to break up the dominance of the continental domestic markets by the big European energy firms.

So, for the time being, do we just grin and bear it?

Not quite.

Apart from using less energy at home, you can still cut your bills by switching supplier.

This might seem a waste of time if you assume that all suppliers are likely to move their prices up, more or less in unison.

But they do charge different prices.

And if you have never switched, or did so only a long time ago, you may well be on a tariff that is noticeably more expensive than the best deals you can find now, even from your existing supplier.

So how many people have switched?

Consumer research suggests that of the 21 million households in the UK that buy both gas and electricity from the big suppliers, 20% have never switched.

With prices rising, more bill payers are considering deals that fix the price of energy for a set period of time - British Gas, for example, said 2.1 million of its customers are on a fixed-rate deal.

Most of the larger suppliers have offered at least one of these tariffs, but some have recently closed them to new customers.

They have tended to be more expensive than current standard tariffs, however, and do carry a penalty of roughly 100 if you decide to switch suppliers.

Is anything being done to reduce prices in future?

In the longer term, more pipelines have been opened to import gas directly from Norway and Belgium.

Storage facilities have been built for liquefied natural gas in places such as Milford Haven, so we can store gas supplied by tanker from further afield, such as North Africa, the Middle East and South America.

More LNG terminals have been proposed, along with many more storage sites around the country.

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