UK: Hike in energy prices expected

Millions of households faced further pain today after British Gas owner Centrica signalled it may have to make another hike in energy prices.

A leading City firm predicted tariff rises of up to 18% in the coming months after Centrica revealed that wholesale gas prices for the second half of this year were double those compared with a year ago.

In January Centrica hiked bills by 15% for British Gas’ 16 million customers, warning that its residential supply arm would have been loss-making otherwise.

However, the group said today that overall operating profits for the first half of this year would still be “materially lower” compared with a year ago, mainly due to the pressure on the British Gas (BG) business.

“While the current outlook for gas prices does create a challenging environment for energy suppliers, we will take the necessary action to deliver reasonable margins in the retail business,” it said.

Britain’s five other major domestic energy suppliers – E.ON, npower, Scottish and Southern Energy, Scottish Power and EDF – all raised gas and electricity prices earlier this year along with BG.

Centrica’s hike took the firm’s average annual dual fuel bill to £1,055 (€1,333), up £143 (€181). Those paying by direct debit saw bills go up an average of £131 (€166) to £968 (€1,223).

A further increase will be another blow to households as they battle higher motoring, food and mortgage bills. The price increases earlier this year contributed to inflation rising beyond the Bank of England’s 2% target.

Peter Atherton, an analyst at Citi, said he expected Centrica to raise retail prices by up to 18% later this year, depending on how it covered losses in its industrial and wholesale arm, which supplies gas to large-scale customers.

He said of the firm’s “necessary action” warning: “In our view this clearly flags that Centrica intends to raise retail prices again later this year.

“We expect Centrica to raise retail prices by 12% to 18% later this year depending on whether it tries to offset losses in its industrial and wholesale contracts.”

Mr Atherton noted last week that wholesale gas prices were 27% above the levels at which Centrica last raised retail prices.

A note from Societe Generale last month said the company’s residential arm could be loss-making in the first half of this year, if it fails to hike its domestic prices again.

The company has a long-term margin target of between 5% and 7%, but SocGen said the residential figure could be in the region of 2% this year and may even be negative in the current half year.

In today’s trading update, Centrica indicated that it has lost around 100,000 customers since January’s price rise, taking its numbers to 15.9 million.

Wholesale energy costs have been rising in the UK due to record oil prices, rising demand in Asia for the available liquefied natural gas (LNG) and insufficient supply from continental Europe.

A weaker pound compared to the euro has also added to the price pressure.

Historically, the UK has benefited from lower gas prices during the summer due to domestic overproduction and easily available imports. But with hydrocarbons such as gas and oil now viewed as a scarce resource, there has been more intense competition for supplies from the continent.

Since the start of the year, the Interconnector sub-sea pipeline, which provides a link between UK and Continental European energy markets, has mainly flowed from Europe to the UK through the 143-mile (230km) pipeline between Bacton in Norfolk and Zeebrugge in Belgium.

With European gas prices linked to the cost of oil, that means UK gas imports have been exposed to the fuel’s spiralling prices. Crude oil is now more than US$125 a barrel, a rise of more than 25% since the start of the year.

Centrica’s shares were up more than 2% today after its announcement.