Select Committee on Trade and Industry Twelfth Report


1  Introduction


1. During the summer and autumn of 2004, the UK witnessed rapid and substantial increases in the wholesale price of gas. This resulted not only in significant increases in retail gas prices for both domestic and industrial and commercial customers, but also, because about 40 percent of electricity generation in England and Wales is gas-fired, in rising electricity prices too. However, concerns about the functioning of the gas markets had started earlier than this.

2. On 14 November 2003, the regulator of the gas and electricity markets, Ofgem, began an inquiry into the significant price spikes[1] that had taken place in October and November 2003. Ofgem published an interim report on 28 May 2004, discussing seven potential explanations for the rise in gas prices, but coming to no definite conclusions other than narrowing the possible causes to two: lower than expected gas supplies from offshore producers, and the continued export of gas through the interconnector to Belgium even though British gas prices were much higher than reported prices on the Continent.[2] Ofgem decided to undertake further inquiries on these two issues, and in October 2004 published a comprehensive analysis of the causes of the 2003 price rises, plus those in August to September 2004 and the increases in October 2004 in forward prices for the following six months to a year.[3]

3. We decided to undertake an inquiry into the price increases. Rather than repeat Ofgem's work, we thought it more valuable and interesting to focus on the effects of the price increases on all types of energy customers, and in particular to try to determine whether the rises were a temporary response to short-term supply problems or are the start of a long-term increase in UK energy prices and to suggest what Ofgem's and the DTI's responses to the problem should be.

4. We received written evidence from over 80 companies, organisations and individuals, and took oral evidence from: the Association of Electricity Producers; BP plc; Centrica; the Chemical Industries Association; the Department of Trade and Industry; the Energy Intensive Users Group; the consumer watchdog, energywatch; the Engineering Employers Federation; E.ON UK plc; the Directorate General for Competition and the Directorate General for Transport and Energy, the European Commission; the Fuel Poverty Advisory Group; National Grid Transco; the regulator of the gas and electricity industries, the Office of Gas and Electricity Markets ('Ofgem'); Scottish and Southern Energy; Shell UK Ltd; and the UK Offshore Operators Association. We are grateful to all those who supplied evidence to us. We would also like especially to thank our specialist adviser for this inquiry, Professor Alex Kemp of the University of Aberdeen.


1   Sudden price rises, followed by a decrease in the price Back

2   Wholesale Gas Prices in October and November 2003-Interim Report, 118/04 Back

3   Ofgem's probe into wholesale gas prices, 2 volumes, 232/04. All references in this Report are to Volume I: Conclusions and next steps, 232/04a - hereafter referred to as 'Ofgem report' Back


 
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