Best Financial Markets Analysis Article A 100% rise in the wholesale gas price has resulted in retail gas suppliers in recent days pushing gas prices sharply higher. First to raise was EDF which announced a 22% rise, quickly followed by Britain's biggest gas supplier British Gas which today announced a 35% price hike.

As the below graph illustrates that undoubtedly the price of gas on the wholesale market has risen sharply for Winter delivery as the bulk of gas demand occurs during the winter months, the current price for October is 85p per therm, against today's spot price of 31p per therm, which illustrates the degree of volatility.

British Gas Price Hike

Firstly gas bills are priced in Kwh rather than pence per therm, therefore the conversion is for 1 therm being equal to 29.31 Kwh., thus 1 Kwh is equal to 0.034 therm's.

Therefore the market price of 85p for winter delivery is equal to 2.9p per Kwh.

The actual price British Gas customers pay is estimated at 7.3p per Kwh - Or 250% of the winter market price .Therefore a 35% price hike would equate to a price rise of 2.6p KwH to 9.9p (corrected 31st July 08)

The new price of 9.9p / KwH is against the current market price of 31p per therm or 1p / Kwh, and 2.9p Kwh Market price for Winter 2008, which equates to 10 times the current market price and nearly X4 the winter price.

A price rise inline with the winter price would have seen a rise of 100% in the market price from 1.5p to 2.9p and therefore 1.4p per KwH. The actual increase is for 2.5p, exactly what are centrica charging the extra 1p per KWh for ? The 2008 and 2009 company results should prove interesting reading.

Is British Gas / Centrica Profiteering ?

To answer this question we would need to take a look at British Gas's parent companies annual accounts i.e. Centrica, as British Gas is part of Centrica after British Gas was split into two groups - BG which is the exploration company, and Centrica which supplies residential and business customers as well as other gas storage activities across Europe.

Centrica & BG Profits

	2005	2006	2007	2008 Forecast
Centrica	£1.8bill	£.034bill	£2.1bill	£1.9bill
BG Group	£2.5bill	£3.2bill	£3.1bill	£5bill

Before the price hike, Centrica made annual profits of approximately £2 billion which equates to £137 per every customer (14.6 million gas+electricity) or approx 14% of the £1000 average annual gas and electricity bill. Following the price hike the average bill is expected to rise to over £1300, and therefore the expectations are now for sharply higher profits for 2008 and 2009, as the price hikes are estimated to be as much as 80% higher than the actual increased costs incurred on the wholesale gas market for Winter 2008.

There clearly exists an illusion of a free market in gas and electricity in the UK which is not borne out by the facts as prices do NOT move in line with the wholesale gas market. It seems price rises occur at near twice the level of the market price rises, and cuts tend to be at far less than when the wholesale gas prices fall, hence healthy profits of £2billion per annum.

According to Uswitch, customers can save as much as £315 by switching suppliers, especially if they have never switched supplier before.

In the meantime Gordon Browns beleaguered government continues to urge wage restraint amongst the mass of workers at below 3%, this does not include MP's (including the generous allowances) or other vocal minorities such as GP's that have in recent years enjoyed pay hikes of over 30% per annum.

Britain is definitely heading for Summer and Winter of discontent, as the public sector unions mobilise to match the surging rate of inflation which is set to pass 4% on the CPI measure, let alone the more accepted RPI which is set to break above 5%.

By Nadeem Walayat
http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Michael Parry
31 Jul 08, 02:58

British Gas Prices

You write

The actual price British Gas customers pay is estimated at 29p per Kwh

No, if you look at

http://www.britishgas.co.uk/pdf/Standard%20gas%20prices.pdf

their prices are are around 7 p per kW hour for the first 670 kWh per quarter and 3.3 p per kWh for anything more. So for a small user of 10,000 kWh per year, the average price would be 4.3 p per kWh and less for people who use more gas.

Kenneth Morton
31 Jul 08, 04:24

Gas Price

I think something is wrong with your gas figures as public are charged (uswitch) as below: -

Click Energy 5 Dual Fuel from British Gas

Unit prices

Gas

5.968p per kWh

2.504p per kWh above 2680 kWh p.a

Electricity

18.82p per kWh

8.80p per kWh above 500 kWh p.a

All prices shown are inclusive of V.A.T. at 5%

Discounts

* Direct Debit Discount : 10.3% or £67.56, whichever is lower (Gas)

* Dual Fuel Discount : £15.00

* Direct Debit Discount : 4.8% or £20.80, whichever is lower (Elec)

All prices shown are inclusive of V.A.T. at 5%

Click Energy 5 Dual Fuel features

* You must agree to paperless billing

* You must manage your account online

Annual cost

Payment method: Fixed Monthly Direct Debit, Estimated cost: £1306.39, based on a consumption of 23943kWh for gas and 7583kWh for electricity.

How have we calculated these figures?

Peter
20 Mar 09, 08:45

Michael Parry: Put on your reading glasses!

Michael, don't be a fool. Re-read the article!

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