November 2003

High Energy Price Investigations

Ofgem is looking into the reasons for the recent sharp rise in natural gas prices, which if maintained could see UK businesses and households pay higher gas bills this winter.

Industry watchdog Ofgem has announced it is investigating the recent massive increase in wholesale gas prices following accusations of manipulation.

Accusations that gas producers have been manipulating prices led Ofgem to announce an investigation into movements in the wholesale market on Friday 14th November. The investigation follows a doubling in the price of gas in the last two months, which means higher prices for gas users renewing their gas contracts this winter.

Wholesale gas prices rose from 15p/therm (0.5118p/kWh) in September to 34p/therm (1.1601p/kWh) last month.

"We have a duty to consumers to very carefully examine the reasons behind these gas prices," said Alistair Buchanan, Ofgem's chief executive. "We will be examining why - when demand for gas is not particularly high and the supply of gas is not low - we have still seen prices go up by 80% in October." Ofgem will be "seeking views" from the industry on reasons for the high level of gas prices, and examining the allegations it has received about possible manipulation of wholesale gas prices, and will then decide whether to begin a formal investigation.

Under the Competition Act, Ofgem can punish companies found to have artificially inflated gas prices by fining them up to 10% of their UK turnover. It can also apply further penalties if a company has broken market rules.

According to the Energy Industry Council, previous calls for the regulator to analyse the market seemed to fall on deaf ears, and it is only now, after it has been suggested that domestic consumers could face significant price increases, that an investigation has been authorised.

Energy supplier Powergen recently announced it would increase its retail prices in 2004, blaming a 25% rise in electricity prices and 18% increase in gas prices over the past year. The company said the average domestic bill would increase by 6.9% for electricity users and 4.9% for gas customers - the equivalent of 38p and 27p a week respectively.

Wholesale gas prices are higher than at any time since the market was deregulated in the 1990s. The increases, combined with higher coal prices, have also affected electricity costs.

Gas traders and industry sources say that the recent gas price rises are unrelated to other energy price increases and not a result of market manipulation, but reflect structural issues within the industry and a lack of information about supply given by North Sea gas producers. This latter issue was highlighted in a report by Ofgem following an investigation into the summer disruptions on the interconnector pipeline between the UK and Belgium.

If you would like anymore information regarding this issue please contact Aneeta Patel.