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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