British Gas Raises Prices:

The U.K.’s largest energy supplier Centrica PLC Friday raised gas and electricity prices on one of its tariffs that tracks the value of wholesale markets, presaging what industry analysts say is likely to be another round of steep increases in U.K. utility bills. 

Centrica’s retail arm British Gas put up its market-tracker tariff, which changes every quarter in line with movements in wholesale prices, by an average 14.2% for gas and electricity customers. A spokesman for Centrica said the increase will only affect 2,500 customers on this niche tariff, out of a total of around 16 million, but the company recently hinted that the majority of customers will face higher bills before the year is out. 

“Record oil prices have continued to drive up wholesale gas prices. Since the market tracker launched in July 07 wholesale gas prices have increased by 104%,” said the spokesman. Centrica says this sharp increase in wholesale costs has eaten into the profit margins from British Gas’ fixed-price tariffs, and to a lesser extent for other U.K. utilities. “We will take the necessary action to deliver reasonable margins in the retail business,” Centrica said last month in a statement widely interpreted as a sign that it bills will rise. 

“Over the coming months and possibly years, pressure on retail prices is going to be upwards,” said Chief Executive of E.ON U.K. Paul Golby, the country’s third largest utility by customer numbers, this week. “If you look at how high wholesale prices are, they have accelerated significantly ahead of where retail prices have gone so the pressure is clearly there.” 

Ian Marchant, chief executive of number two U.K. utility Scottish and Southern Energy PLC said last week the industry can’t defy the gravity of rising wholesale prices. U.K. gas traders say the soaring price of oil is to blame for higher U.K. gas prices. The U.K. has a free-floating natural gas price based on trading at a hub called the National Balance Point. But as domestic gas production declines, the country’s imports are rising and hit 20% of total consumption in 2007, according to government figures. The majority of imports come from the rest of Europe. 

Gas in mainland Europe is supplied on long-term contracts whose price is linked to the value of oil or oil products. The bulk of gas Norway sells is also priced this way. As oil prices have soared by more than a third since the beginning of the year, going briefly to $135 a barrel, the price European gas imports vital for meeting the shortfall in indigenous U.K. supplies have risen in tandem. The average price of gas in the U.K. for delivery next winter has risen 57.3% since the beginning of the year to 94.5 pence a therm. The effect is magnified further into the future. The average price for winter 2009-2010 is up 61.9%.

The big six U.K. utilities - Centrica; Scottish and Southern; E.ON U.K., a subsidiary of Germany’s E.ON AG, Npower, a subsidiary of RWE AG; Scottish Power, a subsidiary of Spain’s Iberdrola SA; and Electricite de France SA - have already raised customers bills by 15-20% earlier this year.

If the companies are to maintain their targets for profit margins, analysts say similar increases will soon have to follow. Further price increases are likely to spell trouble for the wider U.K. economy. Rising road fuel and gas and electricity bills are contributing to rising inflation, forcing the Bank of England to maintain interest rates at 5% this week despite an accelerating slide in house prices and signs the U.K. economy may be following the U.S. into a significant slowdown.

The high cost of energy has also become a hot political issue. Last week hundreds of trucks rolled into central London, jamming a major route into the capital to protest over fuel taxes. Voters seeing their house prices fall and inflation and energy bills erode their income have been deserting the governing Labor party in droves, handing a major victory to the opposing Conservative party at a recent mid-term parliamentary election.