Energy price hikes very likely…but how much and when?

Due to a sustained rise in wholesale gas prices over the past year, analysis from indicates that further energy price hikes in the summer of 2011 are now very likely and will probably take energy bills to new record levels.

Wholesale Energy Prices May 2011

Wholesale Energy Prices May 2011

Rumours of another set of energy price hikes have started doing the rounds with some suggesting that the next wave of increases could start as early as this month. The purpose of this update is to provide the context for any potential
increases with a view to understanding when prices might rise and, if so, by how much.
Firstly we take a quick look at what has been happening in wholesale energy markets.
Oil prices have risen significantly since the start of 2011 driven both by strong demand from emerging market economies but more importantly from instability in the Middle East and Northern Africa. Oil prices broke through $100 a barrel at the start of 2011 as violent protests in Tunisia spread across to Egypt and then into Libya. Brent crude at over US$ 120 a barrel is still 15% below its 2008 peak. However, the price of oil in GBP sterling went above its July 2008 peak in April 2011 and has stayed there ever since. This is bad news for UK consumers as anyone filling up their car will know.
Wholesale gas prices have also been rising rapidly driven by the higher price of oil and by concerns over supply disruptions as a result of violence in Libya and the earthquake and tsunami in Japan. The later has led to a diversion of LNG (liquefied natural gas) cargoes to Japan in response to a shutdown of nuclear generation capacity.
Gas prices have risen by 15% in 2011 and by 84% since their bombed out levels at the start of 2010. What should be particularly worrying consumers is that wholesale gas prices are 20% higher than they were at the beginning of December 2010 which is when energy suppliers last starting increasing energy bills. It is worth noting that despite the recent run, wholesale gas prices are still a good 30% below their 2008 peak.
Wholesale electricity prices have also rallied over the past 2 months but by nowhere near as much. After a sharp run up in March the price rally has stalled due to plentiful supplies of power and muted demand. Wholesale electricity prices are up by 7% in 2011 and up 15% since December 2010. Despite this, wholesale electricity is still 45% below its 2008 peak levels.
Wholesale Energy Prices Graph May 2011

Wholesale Energy Prices Graph May 2011

The graph above shows the spread between wholesale and retail gas prices on a comparable basis. While the spread has narrowed significantly over the past 6 months it still remains in positive territory. It is clear from this that we are NOT going to be facing a re-run of 2008 because:

  • Wholesale energy prices are still nowhere near their peak levels of 2008 but
  • Retail energy prices are 20% (£177) higher than were in April 2008 (the last time wholesale prices were at current levels heading up).

How much to expect?
Analysis from shows that we are getting to the point where higher input costs, particularly on the gas side, are putting pressure on margins. As such, we are likely to see another round of price increases later in 2011.
On top of rising commodity costs (which are transparent) energy suppliers also face rising infrastructure and environmental charges the impact of which is more difficult to quantify. We are not the only ones struggling with this point. Ofgem, the industry regulator has recently criticised the industry for the lack of transparency in the way energy supplier’s account for the cost of power in their supply businesses and has decided to appoint an independent accounting firm to further investigate this. But it is worth re-iterating. Average energy bills are £177 higher today than they were 3 years ago when wholesale prices were at comparable levels so energy suppliers have plenty of additional revenue (£4 billion pounds of it) to cover higher non-commodity costs.
On balance we expect a further price increases in the 5-10% range which would add between £50-100 to the annual household energy bill and would put energy bills at a new record high. Increases in the double digit range cannot be ruled out.
Historically, energy price increases would typically get announced in March and September of each year to coincide with the industry’s traditional April and October hedging cycles. More recently, energy suppliers have tended to bring their prices announcements forward particularly when a price increase was considered to be inevitable. For example, in June 2008, when the wholesale price of gas was higher than the price at which companies were selling it for in the retail market, it was obvious that a massive increase was inevitable.
In this cycle it is not yet inevitable that we will see price increases, as wholesale prices could yet fall back. On balance we think price increases are very likely and that suppliers will begin to announce them over the next 1-2 months. Energy supplier must now provide customers with at least 30 days advance notice of a price increase, so we expect the increases to kick in from July onwards.

What we think:
A rapid rise in wholesale gas prices driven by events in the Middle East and Japan means that it is now very likely that we will see further increases in energy prices that will take energy bills to record levels. Against this background it is still worth going for a fixed rate deal. You can still sign up for a fixed rate tariff that is not only cheaper than standard tariffs today, but will look like great value when energy bills start rising again.

Standard Energy Bills Analysis

Standard Energy Bill Values May 2011

Standard Energy Bill Values May 2011

The prices shown are for the average of Monthly Direct Debit for the relevant suppliers’ Standard tariff based on an average usage profile (16500 kWh gas and 330 kWh electricity on a standard meter).

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