Heads Up!

July 6, 2008

It looks like gas prices are going up again- and soon- and if prices are going up in Europe, they will be going up here as well.

British Gas, the country’s largest energy supplier, is preparing for a fresh round of energy price rises of at least 15 per cent, which could hit its 16 million customers within a matter of weeks.

Centrica, the owner of British Gas, is struggling to maintain profitability in its retail energy business as gas prices have trebled over the past year. Wholesale gas prices soared to a fresh record last week, adding to the pressure on Sam Laidlaw, the chief executive, to act swiftly to ensure the business is not forced into a loss this year.

UK forward gas prices for delivery in January 2009 touched a high of £1.13 per therm last week, up from 50p per therm a year ago. The price of gas is closely linked to crude oil, which rose to a new record of nearly $146.69 a barrel on Thursday.

Compounding the pressure on Britain’s power companies, wholesale coal prices were also driven to record levels last week. The price of the benchmark contract for a tonne of coal for European delivery in the third quarter of this year hit $225 this week, up from less than $80 a year ago. Coal is still used to generate 30 to 35percent of UK electricity.

All of Britain’s big power companies – E.ON, EdF, Scottish Power, N-Power and Scottish and Southern Energy – are facing similar pressures and all of them are expected to raise prices over the next few months.

Centrica, however, is particularly exposed to soaring wholesale prices because it suffers from a shortage of its own gas and power supplies, forcing it to pay premium prices on the open market. It is expected to be among the first to raise prices.

One senior industry source said: “They are really feeling these prices… so it is just a question of how long they can hold on without being forced to issue a profit warning. Nobody wants to be put in that position.”

Another source added: “By the time you get into September, the volumes of gas being used increases sharply which magnifies the losses, so the end of August would be the very latest.”

Senior management is discussing the timing and scale of a price rise. Raising prices in July could protect margins but invite greater popular hostility than an increase in August. It may stagger smaller increases – totalling 30-40 per cent – between now and January 2009. This is thought to be the favoured option but there has been talk of a single very large rise. “It’s inevitable that we will see retail prices increasing,” said Andrew Horstead, energy analyst at Utilyx, a consultancy.

Gas prices are also being driven higher by fears of a shortage of North Sea supplies this winter. A National Grid report suggested domestic gas production is falling faster than expected. The shortfall means that more liquefied natural gas will need to be imported from overseas this winter. Centrica said it monitors the market carefully but declined further comment.

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One Response to “Heads Up!”

  1. [...] – bookmarked by 4 members originally found by kendokendokendo on July 22, 2008 Heads Up! http://sigmundcarlandalfred.wordpress.com/2008/07/06/heads-up-2/ – bookmarked by 3 members [...]

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