Supplementary evidence submitted by Centrica
1. British Gas typically moves first when
prices increase
It is not true to say that the first mover is
typically British Gas. In the last four years, the only time when
we have "moved first" was in 2007 when we were the first
to reduce prices and the only supplier to reduce them twice—by
a total of 20%.
Recent evidence shows that we have not led on
price increases. For example:
— 2008: npower announced first on 4
January, then Edf 15 January, then British Gas.
— 2006 half 2: Scottish Power led 22
June, Edf followed on 24 July; British Gas were third to move.
— 2006 half 1; Scottish Power led 9
February; Edf followed 15 Feb; British Gas were again third to
move.
— 2005; Powergen moved first 21 July,
Edf followed 29 July, British Gas moved third.
— 2004; Powergen and Edf again both
announced before British Gas.
2. UK liquidity compared to Europe
According to Gaselys (a French owned energy
trading company) around 90% of European gas liquidity comes from
the UK. We have, however, observed that there is lack of long-term
liquidity. This may be due to the fact that significantly greater
price volatility in the UK has contributed to producers' reluctance
to sell further out.
The UK power market is not as liquid as gas
but it is still amongst the most liquid. Though on some measures
it is likely that the German market might appear more liquid than
the UK, the markets are not directly comparable. In the UK, the
only link to other countries is through the France-GB Interconnector,
which is 2,000MW (the GB-Ireland Interconnector could be considered
an additional 400MW). Contrast this with Germany which has over
17,500MW of interconnection with eight different countries.
In order to get a fair comparison of liquidity
between UK and German markets these significant structural differences
would need to be considered and would certainly make the UK power
liquidity picture look much more favourable than the initial numbers
would suggest.
3. We are increasingly becoming dependent
on global sources of gas
In 2007, approximately 27% of UK gas had to
be imported to meet demand. This year, we expect it to be nearer
40%. The UK is no longer a "gas island". We are increasingly
interconnected via pipeline and LNG so that the UK wholesale market
gas price (and the pricing of gas supplies contracted on a market
index base linked to oil) is more and more influenced by the wider
European/global supply, demand and pricing position. We would
support the decoupling of oil and gas in European contracts which
is adversely affecting UK wholesale prices and leading to higher
prices.
4. Benefits of vertical integration
Vertical integration through asset ownership
and/or by contract is a natural reaction to power price volatility
as it helps companies to manage wholesale price volatility and
provides greater certainty in customer prices. As a result, all
the six major energy retailers are vertically integrated to a
certain degree, though Centrica is the least vertically integrated
of all suppliers. Despite this degree of vertical integration,
it is important to note that over 40% of the generation market
is held by independent generators without significant residential
market positions.
5. Switching amongst prepayment meter customers
Contrary to the perception that prepayment meter
customers do not switch, recent evidence from Ofgem indicates
that in 2007 prepayment meters customers switched at least as
much as those that pay by direct debit, while standard credit
customers switched less frequently. The figures are as follows:
|
| Gas | Electricity
|
|
| Direct Debit | 21% | 21%
|
| Prepayment | 23% | 20%
|
| Standard Credit | 13% | 12%
|
|
| |
|
This trend of prepayment meter customers actually switching
more than others is entirely backed up by our own data.
6. Prices in Great Britain are systematically rising much
more quickly than in Europe
According to the BERR's latest Quarterly Statistics, the
estimated average domestic gas prices including taxes in the UK
for medium customers as at 1 January 2008 were the lowest in the
EU 15 and were 45.3% lower than the median.
Similarly, the estimated average domestic electricity price
including taxes in the UK for medium consumers as at 1 January
2008 was the second lowest in the EU 15 and was 33.6% lower than
the median price.
Whilst these figures do not take account of the retail price
increases earlier this year, neither does it include European
price increases. In Germany, where energy bills are already amongst
the highest in Europe, gas prices are set to rise 20% this year
whilst the electricity price is expected to grow by a minimum
of 10%.
24 June 2008
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