When OVO Energy increased the price of its New Energy Fixed tariff by 8% (around £70 a year) at the end of April 2010, we cautioned that this was an early warning sign that discounted tariffs were probably on their way up. And while we have yet to see the other new entrant (first:utility) push its prices up, we have seen the second major warning sign. Recently, Scottish and Southern Energy replaced its cheapest online tariff with a new tariff, Go Direct 5 that is 10% more expensive than its predecessor (£88 for the average user).
Why is this happening?
Quite simply, because wholesale gas and electricity prices are again rising sharply.
In 2009 natural gas was one of the worst performing commodities around. The linkage between wholesale gas prices and oil prices was commonly blamed on the record rise in domestic energy bills that consumers had to endure in 2008. However, while oil prices doubled in US$ terms in 2009 (and increased by 80% in sterling terms) wholesale gas and electricity prices actually fell by 34% and 30% respectively during 2009.
In 2010, the trend has reversed. While US$ oil prices are basically flat on the year (up 9% in sterling terms due to a weaker pound vs. the dollar) wholesale gas prices in the UK are up by over 35% (see graph below).
What’s behind the increase in wholesale prices?
Wholesale prices are being driven up for a number of reasons. Gas inventories in the UK and Europe were significantly depleted following the coldest winter in 30 years. As European suppliers and industries look to rebuild their stocks ahead of the winter, gas is being imported from the UK via the interconnector as it is cheaper than buying European gas based on contracts linked to oil prices. In addition production interruptions in Norway and concerns over possible strike action by North Sea oil and gas workers is keeping prices firm.
Wholesale electricity prices are in turn being pushed up by higher gas prices (around 40% of UK electricity is generated from gas fired power stations) and from tighter capacity in the system.
What we think:
The link between oil prices and wholesale gas prices which appeared to have broken down in 2009, is again re-asserting itself with a vengeance. This means that going forwards UK energy bills will again be driven by international oil prices.”
What does this mean for UK consumers?
In our last update we pointed out that the new entrants in the UK energy market, OVO Energy and first:utility, had been able to take a price cutting lead in the energy market not just by running efficient operations, but by being able to take advantage of low and falling wholesale energy prices.
As the wholesale markets have turned upwards one of the smaller suppliers (OVO Energy) had to increase its prices for new customers. Not only that but, based on last week’s price change by Scottish and Southern Energy, it now seems that even the larger suppliers are struggling to keep energy prices down.