The rise and fall of gas prices
Rising oil prices and an increased reliance on European imports sent UK domestic gas bills soaring over the 2003-2006 period. Currently, gas prices are falling again, but what does the future hold for the price of gas?
Links between wholesale and domestic gas prices
About half of the cost of our gas bills comes from the wholesale gas price (the price paid by the gas companies when purchasing gas for its customers). Therefore the wholesale price of gas has a huge effect on the domestic price of gas.
Wholesale gas prices in the UK went up dramatically between 2003 and 2006, and this was transferred to customers. The average annual gas bill almost doubled between 2003 and 2006.
Wholesale gas prices started to decline again in the latter half of 2006, and we are currently (May 2007) seeing domestic price cuts by the gas companies. British Gas announced two price cuts in early 2007.
The lag between wholesale gas and domestic gas prices is generally explained by the fact that gas companies buy much of their gas up to 9 months in advance. The gas used over the winter of 2006-7 was bought at inflated prices and so gas bills did not start to drop until 2007.
Despite a general assumption that gas companies are quick to pass on increases in wholesale prices, and slow to pass on decrease, the energy regulator Ofgem claims this is a myth. They say that wholesale gas prices started to increase in June 2003, but this did not filter through to customers until June 2004.
The UK depends on gas imports from Europe
Supplies of natural gas from the North Sea are dwindling, and so the UK is becoming a net importer of gas. We are becoming reliant on gas imported through pipelines from continental Europe, and the imports of Liquefied Natural Gas (LNG) from further afield are also increasing.
This was a major reason for the increased wholesale gas prices of recent years. European gas prices are influenced by oil prices, and therefore went up during the 2003-2006 period. As our gas supplies are now linked to Europe, our gas prices went up too.
The European gas market is not fully competitive, and this is bad news for UK wholesale prices during times of high demand. Essentially, during cold weather, European countries hold on to reserves of gas supplies, even if they could make more money by selling to the UK. This makes it difficult for us to get hold of European gas at times of highest demand, causing wholesale prices to peak.
In March 2006, there was almost a gas crisis due to a spell of cold weather and a fire in a major gas storage facility in the UK. The National Grid, responsible for gas distribution in the UK, warned businesses to cut energy consumption, as gas companies could not find European companies willing to sell them gas.
What is the future for gas prices?
The import capacity of the Interconnector pipeline (which links us to gas supplies from Belgium) has been increased, most recently in October 2006. Also in October 2006, the Langeled pipeline which links us to Norway was opened. More import terminals for LNG are also under construction.
Therefore the overall import capacity for gas has improved, which has contributed to a fall in wholesale gas prices. This should help keep prices low, although as mentioned above, a large import capacity can be useless during times of high demand. When gas prices in the UK increase, the flow of imports should increase. However, with the current European market, this correlation breaks down during cold weather.
Ofgem are working with European energy regulators and the European Commission to liberalise the European gas market. This is essential if Britain is not to run short of gas during future cold spells. Until this happens, we could see dramatic peaks in winter gas prices.
Gas bills are unlikely to fall to pre-2003 levels. This is due to increased reliance on imports, and money being spent to combat climate change. For example, under the Energy Efficiency Commitment, gas companies are forced to spend money on promoting energy efficiency.
However, according to Ofgem, as of October 2006, domestic gas prices in the UK are the lowest in Europe.
How to reduce gas bills
Because the UK gas market is competitive, you should be able to reduce gas bills by switching to a cheaper supplier. Ofgem and Energywatch encourage this, as it helps keep the market really competitive. They provide lots of advice on changing payment plans or suppliers on their websites, as does Uswitch.
If you found this page useful please click the +1 button below to tell Google that its a great page!
Please share this page with others, and leave a comment, we value all feedback!
Was this page useful? Do you have something to add? Do you disagree?
If your comments meet our guidelines then we will publish them (you do not need to register!)
Ttradesman - click here to join our network to receive leads from customers in your area
"why cant you show present day wholesale gas prices. is the price of gas going down?"
"The article states that the European Gas prices are linked to the Oil Price. Why is there a link between oil and gas?"
"Why are gas prices not falling as it is linked to oil prices and oil is now below $70 a barrell"