UK domestic energy bills expected to soar as suppliers prepare to increase tariffs

                                                                                         

UK energy suppliers have indicated that customers are likely to see higher energy prices in 2008. Rising wholesale prices have again been cited as the motivation for raising household bills. However, the argument in favor of an upward adjustment is tenuous and lacks substantial evidence to justify this move, so energy suppliers will have to be careful about how they implement any increases.
According to media reports, UK energy suppliers, including major residential players EDF Energy, E.ON and British Gas; are paving the way to raise retail prices as early as January 2008 in order to offset rising wholesale costs. Suppliers have argued that they have had to bear the consistently high wholesale costs seen in recent months, and that costs have not been passed on to the end user. As a result, costs may now have to rise more than 10% to protect margins, tipping the GBP1,000 barrier for the average customer. From the suppliers' perspective, the main cause for rising wholesale prices is the market's response to unexpectedly tighter supply conditions coupled with higher demand, which has occurred as a result of sub-zero temperatures (and the subsequent increase in consumption of heating oil) in the UK.
In addition to the endogenous factors in the domestic energy model, external forces are also to blame. Bottlenecks in gas supply via IUK, the Bacton interconnector (that has recently been in reverse flow), has also been a factor behind the UK's tight supply position and high prices. This focuses on the lack of imports caused by vertically integrated European firms and national protectionism, ultimately distorting competition in the UK. Gas flows from Europe have once again been in the spotlight, as cold weather hit the UK. Although gas consumption and power generation increased in the UK, this was not accompanied by reserve gas sourced from abroad, despite the fact that, typically, in a free and transparent market, rising prices would signal the opportunity to arbitrage and earn profit where price differentials exist.
The impact is much less opaque. The newly introduced price tracker products are the first in line to reflect changes in the trading environment; however, standard tariffs are forecast to change as power and gas prices firm during December and close higher than in November trading at the NBP. According to npower, an estimated GBP87 will be added to the average annual household gas bill and around GBP44 will be added to the power bill for those consumers on tracker tariffs. Standard tariff customers can expect to pay double digit increases across the board when prices are reviewed in 2008.
Pricing dynamic and cost pass-through are contentious and complex issues. As a result, the decision to raise tariffs will undoubtedly be greeted by a spectrum of angry customers. Concern will be high, in particular for the UK regulator Ofgem, regarding the impact that rising costs could have upon fuel-poor customers, currently estimated at around four million households.
It is, therefore, not entirely clear exactly what is causing this speculation about price rises and how pricing strategists and policymakers are influenced. The facts continue to remain unclear on the demand side, with the Met Office estimating that "temperatures for the remainder of the winter period are more likely to be above normal than below normal over much of Europe." This is contrary to traders' sentiments, as they have speculated strongly against below-norm, colder temperatures. The seasonal effect may account for a short-term upward adjustment; however, some traders have suggested that the UK may be experiencing a knee-jerk reaction and the key question is whether prices are sustainable at the current level of trading.
With rising inflation and the risk of an economic downturn, the prospect of rising fuel costs will compound early gloom for debt-laden consumers in 2008. However, customers that signed up to fixed-price deals will be insulated from the uncertainty and may benefit from the upside risks as a result. Gas and power suppliers will need to tread carefully in their price-setting decisions, given that current market conditions serve little or no purpose in defending price increases.

About the author:
Velimir Lackovic runs internet portal "Energetika" ( http://www.energetika.co.yu )
dedicated to renewable energy sources,oil gas and energy efficiency. Velimir has
completed gratuadte studies in power systems engineering and
has industry experiance of over 20 years in this field.

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