Memorandum submitted by Scottish Power
Limited
1. ScottishPower is a major participant in the
energy market at a retail, networks, wholesale and generation
level. This brief memorandum has been prepared in order to assist
the Committee in discussing energy prices.
2. The attached charts show the evolution of
gas and electricity wholesale prices over the past year, compared
with the movements in the hedged price, using a typical 18 month
hedging strategy as described in the Ofgem Probe report. We have
used 12 month published prices rather than prices for immediate
delivery so as to even out short term fluctuations.
3. The hedged price does not specifically represent
ScottishPower's circumstances, but reflects our view as to the
general position within the industry. In the case of the hedged
gas price, we have also included an estimate of the effect of
typical long term contract positions, based on a judgemental review
of public domain information.
GAS
4. Starting with the gas curve, it shows:
(a) the industry adsorbed the increases in the
Weighted Average Cost of Gas (WACOG) through the Spring and early
Summer of 2008 before increasing prices; and
(b) WACOG rose much less than the wholesale price,
allowing customers to be protected from much of the peak, but
it has fallen by only 8p/therm—much less than it rose. This
is because of the effect of gas purchased up to 18 months ago
being used (and therefore dropping from the calculation), together
with new purchases coming into the figures.
5. This analysis is broadly consistent with
the recent price change announced by British Gas. How much (if
any) scope suppliers in practice have to cut prices will depend
on their actual hedging and long term contract management strategies
and the competitive forces that they face.
ELECTRICITY
6. The electricity curve shows a similar position:
(a) the Weighted Average Cost of Electricity
(WACOE) rose significantly earlier than the tariff rise in the
summer;
(b) although WACOE has fallen by about £13/MWh
since the peak, this is around half the amount it rose. Again
this is due to the effect of electricity purchased up to 18 months
previously being used and falling from the calculation, while
new purchases are counted in the figures.
7. Some suppliers raised electricity prices
in July/August by much less than the increase we have assessed
in WACOE to that point. In such cases, the current fall in WACOE
may not be signalling a power price reduction. How much (if any)
scope suppliers in practice have to cut prices will depend on
their actual hedging strategies and the competitive forces that
they face.
February 2009
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