Where next for energy bills…?

Wholesale Energy Prices June 2009

Wholesale Energy Prices June 2009


Oil prices have had a staggering run in 2009. Oil prices have risen by 70% in dollar terms and 50% in sterling terms since the beginning of 2009. Reasons for this performance include expectations of a pick-up in demand as economies recover, OPEC production cuts, and a falling US dollar. The increase in the oil price has also coincided with a sharp increase in net long positions held by non-commercial interests (investors and speculators betting that the oil price will continue to rise).
 
Energy suppliers, when putting through increases in domestic energy bills, will often give a rising oil price as a reason. However, if we look at UK wholesale gas and electricity prices, not only have they not matched the performance of oil, but both wholesale gas and electricity prices are lower than at the beginning of 2009, and quite considerably lower at that. Since 1 January 2009, the sterling oil price has outperformed the sterling wholesale gas price by 82%.
 
So has the relationship between oil prices and wholesale gas and electricity prices broken down? Well in the short-term it clearly has, but it would be premature to call this a fundamental shift in the market.
 
Wholesale gas markets in the UK are linked to oil prices through the partial indexation of European gas prices to oil prices (this indexation is transmitted to the UK when gas is imported or exported through the interconnector) and through the partial substitutability of gas, oil and coal in power generation.
 
- So are gas prices too low?
- Are oil prices too high?
- Is it a bit of both?
 
It’s difficult to say, but on balance we expect that a higher oil price will eventually drag the gas price up with it, and in this respect it is worth noting that wholesale gas prices for 2011 delivery are already 25% higher than the year-ahead price.
 
What does it mean for energy bills?
All interesting stuff, but what does it mean for the cash-strapped consumer? The answer is not much.
 
While there is a risk that wholesale price could rise quite significantly from current levels, the important point to note is that wholesale prices are still so low compared to retail prices that a rising oil price poses no imminent risk of higher energy bills for consumers.
 
The flip side of this is that, while our analysis shows that retail energy bills could be 10-15% lower than they currently are, the risk of rising input costs is likely to mean that energy suppliers will take a cautious approach to the Autumn pricing round and price cuts are likely to be modest, and may not happen at all. Indeed 2009 is shaping up to be a re-run of 2007.
 
Parallels with 2007
 

  • The last time oil prices sustainably broke through $70 a barrel on the upside was exactly 2 years ago in June 2007.
  • In June 2007, the 1-year forward gas price was 1.29p/kWh vs 1.59p/kWh today (19% lower). However if we adjust for currency movements, the difference drops to 7%.
  • All suppliers cut energy bills once with British Gas cutting bills twice.

 
Differences between 2009 and 2007
 
Probably the most significant differences with 2007 are;

  • Energy bills were cut much more aggressively in the first half of 2007 than in 2009. In 2007 the average monthly direct debit dual fuel bill was cut by £107 (11%). For 2009 the comparable figure is only £53 (4.4%).
  • Average energy bills are still £305 (36%) higher than 2 years ago. This means that there is plenty of scope in energy bills to absorb big increases in wholesale gas costs.
Wholesale Energy Prices Graph June 2009

Wholesale Energy Prices Graph June 2009

What we think
 
Given the big difference between wholesale and retail energy prices, the rising oil price poses no imminent threat of higher energy bills for consumers at this stage. It looks far more likely that the energy price cuts we were expecting in the autumn may now be lower than we had hoped for, or may be ditched altogether.
 
As the prospect of further cuts in energy bills recede, it becomes more important for consumers to take greater responsibility for getting the best deal for themselves. Rule number 1 is this. If you are on a standard tariff, dump it. You are pointlessly paying over the odds and can do much better going for a discounted online tariff and paying by monthly direct debit. You could grab a saving of £128 to £225 for 10 minutes work. That’s got to be worth it.

 
Latest Price Changes
Please note that this table uses bill calculations based on analysis from TheEnergyShop.com. These numbers may vary from the headline rates provided by the energy suppliers.

Latest Energy Tariff Price Changes June 2009

Latest Energy Tariff Price Changes June 2009


Source; www.TheEnergyShop.com
The increase shown is for the average of Monthly Direct Debit and Cash/Cheque bills (excluding any prompt payment discounts) for the relevant suppliers’ Standard tariff based on an average usage profile.

Aggregate Increase 2008
Aggregate Tariff Price Increase June 2008

Aggregate Tariff Price Increase June 2008


Source; www.TheEnergyShop.com
The increase shown is for the average of Monthly Direct Debit and Cash/Cheque bills (excluding any prompt payment discounts) for the relevant suppliers’ Standard tariff based on an average usage profile.

 
Standard Energy Bills (7 May 2009)
Standard Energy Bills May 2009

Standard Energy Bills May 2009


Source; www.TheEnergyShop.com
The bill shown is for the relevant suppliers’ Standard tariff (excluding any prompt payment discounts) based on an average usage profile. ScottishPower Cash/Cheque customers can receive a £150 annual discount for paying their bills promptly.

 
Best Deals (24 June 2009 – Monthly Direct Debit)
Best Energy Deals 24 June 2009

Best Energy Deals 24 June 2009


Source; www.TheEnergyShop.com

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