Page last updated at 16:32 GMT, Tuesday, 21 October 2008 17:32 UK

The hidden hand of the gas market

By Paul Burnell
BBC File On 4

Like other householders facing spiralling power bills, Colin Stone has made a series of alterations to his home to cut his energy costs.

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Yet he cannot turn his heating down, as his 14-year-old daughter Helaina suffers from an extremely rare genetic disorder, which means she suffers greatly from the cold in winter and heat in summer.

It means daily hot baths in winter and air conditioning in the summer. As Colin put it: "It's not a lifestyle choice, it is a medical necessity."

Two years ago, his monthly energy bill was 45. It is currently 72, with the next increase, due next month, likely to take it over 100.

As his family makes sacrifices to the rest of its budget, Colin has no doubt who is to blame for the predicament facing millions of homes in the UK: "I think the companies are making excessive profit at the expense of the consumer.

"The fuel companies are very good at putting the prices up and excessively slow at putting them down."

The energy companies blame the rises on factors beyond their control, mainly the rising cost of wholesale fuel used in power stations.

It's a problem exacerbated by the lack of spare capacity in the National Grid, with 20 to 30 power stations currently offline.

However, one analyst also alleges that there is another, less-heralded factor.

I doubt whether more than 20% of the gas available is traded openly on the market
Dominic Whittome, former gas trader

Dominic Whittome, a former head of gas trading for a major energy supplier, believes the bulk of wholesale gas traded is in hidden deals, where the prices offered are never revealed to the markets.

Traders buy energy on the forward market, buying at a specified price for future delivery.

"I doubt whether more than 20% of the gas available is traded openly on the market," he told BBC File On 4.

These bilateral deals are traded away from the market, meaning the market does not know the exact price.

"Furthermore, there is a lack of available gas for purchase on the market, because so much is traded 'under the counter,'" he added.

Scarcity fears

"This creates a perception of traded gas scarcity, which pushed the prices up," he said, adding, "Essentially it distorts or removes effective competition, which in any industry will lead to higher prices - and that, I believe, is one of the major reasons prices have risen 400% over the last 10 years."

Mr Whittome contends that wholesale gas prices could be cut by 10 to 20% if there were more free competition on the forward market.

"If we did take action in the forward market, we could reverse a lot of the price rises that we have seen."

I would say that in in the UK, the vast majority of gas is traded openly and freely
Sarwjit Sambhi, Centrica

His claims are robustly disputed by Centrica, owners of British Gas.

Sarwjit Sambhi, Centrica's director of power business, doubts that 80% of wholesale gas is traded away from the market.

"I would say that in in the UK, the vast majority of gas is traded openly and freely. There are very few off-market deals," he said.

Ofgem probe

However, Mr Sambhi said a lot of gas was bought and sold in bilateral markets in Europe and added, "A more transparent wholesale European gas market would lead to a better understanding of why we're seeing wholesale price changes up or down."

A recent report by the Commons Business and Enterprise committee expressed concern about the low levels of visible trading on gas wholesale markets. Energy regulator Ofgem is currently investigating the problem.

As part of an inquiry which began in February, Ofgem has called on the big six energy suppliers to increase transparency in the wholesale markets, by publishing separate accounts for their supply and generations businesses. It is consulting on whether it needs new powers to combat potential wholesale market abuses.

Ofgem declined a BBC request for an interview.



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