Letter from British Gas
It was a pleasure to meet you at our Conservative
Party fringe on Monday and to touch on your Committee's ongoing
inquiry into the Government's Energy Review and wholesale prices.
I promised to respond to you with our views on some of the specific
questions you had around the wholesale market that you raised
in a recent letter to Mark Clare.
As you are aware, the wholesale gas market has
remained volatile since December 2005. Over the period between
winter 2002-03 and this next winter the wholesale cost of gas
rose by nearly 200% and in the 12 months to July 2006 it rose
by 70%. The average price for 2006 is 52p, 41% higher that 2005
at 36.8p.
With these continuing difficult times in the
energy market, British Gas made the decision not to pass on the
full impact of these higher wholesale prices to protect customers,
with the result that the company has incurred significant losses
over the last 12 months. Following a £75 million loss in
the second half of 2005, British Gas made a £143 million
loss for the first half of 2006. Clearly this level of loss
is unsustainable and the company has no longer been able to absorb
the continuing increases in wholesale gas costs.
As a consequence of the rapidly increasing wholesale
costs British Gas was forced to make two retail price increases
this year. In March we introduced a price increase of 22% for
gas and electricity and more recently in September a further price
increase of 12.4% for gas and 9.4% for electricity was announced.
Other suppliers have also announced similar increases.
To ensure we can cope with winter demand, British
Gas, as with all other energy suppliers, has already locked in
a significant proportion of out winter gas requirements—particularly
for Q4 2006. For the gas already secured, we incurred higher costs
than are now available in the forward market for October and November
2006. However, if we and all other companies left it to the last
moment to buy gas in the market to meet winter gas requirements,
then there could be shortages at the point of delivery which would
result in spot prices being much higher than the forward prices
we have seen.
Crucially forward prices for the main winter
months are particularly high with December at 68p, January at
75p and February at 73p. Prices for Q1 2007 overall are around
70p.
British Gas has already committed that it will
not be raising prices further this year. From winter 2006 we would
expect to see new infrastructure, the Langeled pipeline from Norway
and BBL from Netherlands to bring more gas and put a downward
pressure on wholesale prices during 2007-08.
Indeed as a result of falling oil prices and
the Langeled pipeline delivering its first supplies of gas last
week, wholesale gas prices for the last quarter of 2006 have softened,
coming down by about a third. However it is important to note
that the prices have come from unparalled highs of 80p to 53p.
There remain many risks for this winter and
the market is still not confident about gas flows going forward.
In particular there is uncertainty about how much gas will flow
through new pipeline, how much will come from Europe through the
interconnector and the oil price risk from political uncertainty
in the Middle East.
If there is a sustained fall in wholesale prices
going through 2007 we would expect that to be reflected in retail
prices. In line with this, British Gas are the only energy supplier
offering a tariff that fixes prices in the short-term and guarantees
a fall in prices in the longer-term.
In the meantime we continue to do everything
we can to help our vulnerable customers. We have announced that
we will be making 300,000 rebate payments of up to £90 available
this winter help our most vulnerable customers with their energy
bills. This in addition to a £60 rebate we offered last year.
We continue to work with local authorities, social housing partners
and out six charity partners to deliver our here to HELP
programme which has already reached over 500,000 households in
the UK and led to 41,000 charity referrals.
Finally as I mentioned at the fringe meeting
we believe that the energy retail market remains highly competitive.
Gas prices are still lower in the UK than any other member state
in the EU 15 both including and excluding taxes despite the UK
having the highest wholesale price. With customer switching rates
at about 150,000 per week, energy suppliers are also competing
against each other to retain ad acquire customers through innovative
price and energy efficiency advice designed to help them save
money.
We also believe that calls from some quarters
for a Competition Commission inquiry into the UK energy market
are misplaced. The FSA, Ofgem and the DTI have held investigations
within the last three years into the UK market and found no signs
of malpractice. My concern is that such calls divert attention
from the real problem which is the serious malfunction in the
EU energy market.
I hope this information is of help. If you would
like any further information, please do not hesitate to contact
me.
4 October 2006
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