New pipelines bring hope of drop in UK gas prices

The 11th price increase by UK suppliers so far this year has left customers paying 80% more for energy than they were just three years ago and wondering when the rises will come to an end.

While the prospects for the winter remain uncertain, there are at least signs that the cycle of inflation-busting rises could stop next year as major new pipelines and shipping terminals to bring gas to the UK near completion.

Some in the industry are expecting a period of excess supply across Europe in 2007, particularly in the UK, which could push down the cost of wholesale gas.

A recent research note from Société Générale said: “We believe a European gas bubble in 2007 will push down UK gas and electricity prices.”

British Gas today said it too expected wholesale gas prices to fall and launched a new “fix-and-fall” offer to dual-fuel customers who take both gas and electricity, guaranteeing no more price rises for 12 months and a 5% drop in prices at the end of 2007.

British Gas managing director Mark Clare said this winter was “crunch time” for the cost of wholesale gas.

He added: “As a result of the investments and commitments we have made we can see some light at the end of the tunnel, but it is still a winter away.

“During 2007 and 2008 we should see new infrastructure coming on stream, putting downward pressure on wholesale energy costs.

“We are now prepared to guarantee a fall in prices and and put our money where our mouth is with the introduction of our new fix-and-fall offer.”

The fall in wholesale prices is expected because although the UK will continue to rely on imports, new infrastructure will give traders more choice of where to buy it from.

Last winter, as fears grew of an energy shortage and black-outs in the UK, it emerged that the main Interconnector pipeline, which imports gas from Europe, was running well below full capacity.

The UK blamed the lack of open access across continental energy markets and called for reform.

But the UK will soon be in a better position to overcome such problems thanks to the new infrastructure.

Among projects coming into operation this winter are the Langeled pipeline from Norway and the BBL pipeline from Holland. An upgrade of the interconnector is also due to be completed.

Next winter, capacity to import gas to the UK will be further boosted by connection to the huge Ormen Lange gas field in the Norwegian North Sea, which will have the ability to meet almost a quarter of the UK’s total gas demand.

There will also be increased capacity to import liquefied natural gas (LNG) by ship thanks to developments at Milford Haven and the Isle of Grain.

Société Générale said: “Throughout 2006, 2007 and beyond, large new gas infrastructure projects will be commissioned in the UK.

“These will provide the opportunity to import more gas from the continent, from Norway and from further afield, shipped as LNG.

“This should, in theory, enable great arbitrage between the UK and continental markets, as this arbitrage is currently limited by the physical and contractual restraints of the interconnector, pipeline networks in north-west Europe and access to gas in north-west Europe.”

Société Générale said this will bring UK wholesale gas prices back in line with those in Europe.