Memorandum submitted by Scottish Power Limited (EC 2)

 

 

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