Why aren't gas prices falling?
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Associate Editor
David Stevenson Sep 18, 2009
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While the price of natural gas has fallen, the energy giants have not cut their tariffs for domestic gas supplies. And further price rises look likely this winter. David Stevenson reports.
What's going on with gas prices?
Natural gas prices have tumbled. By early September, the wholesale gas price had collapsed to 34p a therm, roughly a third of its level a year ago. So you might expect consumers to have seen the benefit. Yet domestic gas prices have hardly dropped. What's more, it seems gas customers won't be getting a better deal anytime soon. The 'Big Six' energy giants – British Gas, npower, Scottish Power, Scottish & Southern, EDF and Eon – "will defy growing public anger and the demands of the energy regulator by refusing to cut gas prices at least until the spring", says Tom McGhie in the Daily Mail. By that time, it might be too late – natural gas prices have started rising again.
Haven't suppliers cut prices at all?
A bit... but not by much. From February to early July there were ten price cuts or new tariffs, typically claiming a reduction of about 10%, says Neil Faulkner of Lovemoney.com. But companies haven't cut the cost of their cheapest tariffs, just the expensive ones. Earlier this month one energy company, First:Utility, said its online tariff would be cut by 14.5% due to the wholesale price fall. But Faulkner says a full-blown price war is unlikely: "downward price movements have been more playful than significant".
What's the regulator doing?
Alistair Buchanan, boss of industry watchdog Ofgem, "is under pressure to get tough because the industry is perceived to have successfully undermined his role as a consumer champion", says McGhie. Buchanan wrote last month to all the gas suppliers to say that continued high prices don't seem justified, and demanded they explain why they weren't cutting their prices. The industry's response is expected before the end of the month, when Buchanan will set out his course of action. But his powers remain limited. He could refer the industry to the Competition Commission, but only last year the commission cleared the Big Six of anti-competitive behaviour. And his plans to "name and shame" the companies that refuse to adjust tariffs don't look like they'll cut the mustard.
Aren't gas suppliers making a mint?
They claim not. In their replies to the regulator, the energy firms are likely to argue that the gas consumers are buying today was bought by suppliers up to two years ago when wholesale prices were much higher. They're also likely to stress that the 'non-gas' aspects of gas prices, including transport costs and government environmental measures, have risen by 44%. "Customers have been protected from the massive rises in wholesale prices last year that weren't fully passed on at the time, while companies are investing billions of pounds in new generation capacity to ensure an essential, reliable and safe energy supply to their customers," says the Energy Retailers' Association. And regardless of who's in the right, the whole issue may soon get kicked back into the long grass yet again.
Why's that?
Because natural gas prices are heading up again. Natural gas futures prices on the New York Mercantile Exchange have bounced by 40% from their 4 September lows. Stephen Schork of the Schork Report argues that this is just a dead cat bounce – storage tanks are almost full and "gas is cheap for a reason – there's too damn much of it". But other analysts reckon prices could have bottomed. "I'm 99% certain the doomsday prophets are wrong," says Calgary energy analyst Peter Linder. "Gas is recovering as people recognise prices can stay so low for only so long." And another factor could push prices higher. Regulators across the globe are looking to crack down on volatility in the commodity markets by limiting the size of trading positions. So any hedge funds that have been selling natural gas 'short' (speculating that the price will fall) are now more likely to buy back these contracts, which would create more pressure for prices to rise.
What does this mean for British consumers?
As the time nears for consumers to start putting the heating on, Linder reckons natural gas prices will keep rising for the rest of 2009 and into 2010. Further, low drilling levels in North America, and the resulting drop in production, will mean higher prices longer-term. That would give gas suppliers in Britain another excuse to avoid a real price war – and maybe even raise costs again. The Energy Retailers' Association is already hinting at increases: "the wholesale market still remains volatile and a challenge for energy suppliers coming up to the winter". Indeed, says Faulkner, with Ofgem largely powerless, "there's a 50% chance of a big increase in gas prices for this winter".
Why isn't competition working better?
Because of the way suppliers handle their customers, reckons Faulkner. The number of people who actually switch energy provider is pretty low. There are enough of them around to give energy firms an incentive to make the effort to rank highly on comparison site tables. However, they don't want to offer such bargain deals that they encourage more and more people to consider switching. For one thing, "if one provider slashed prices wildly they'd all have to do so, meaning they'd all make less money". For another, if a customer switches once, they're more likely to switch in the future, which would make the market more competitive, and less profitable in the long run. In other words, gas firms – like banks – profit from consumer apathy. If you've never switched suppliers, you can do so easily via a comparison site such as Uswitch.com.
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