Imagine that the energy market worked the way many politicians and domagogues apparently believe that it does. It would be impossible to know how much turning on the radiator or taking a bath was going to cost. Prices to consumers would vary drastically and immediately depending on the latest supply and demand in the global economy. It would be chaos, and the politicians would be the first to rush to denounce it. The good news, of course, is that it doesn’t work that way, never has and never will. Prices for consumers are deliberately smoothed. We know how much we are going to pay because our energy providers buy gas in advance. The energy most of us consume today was bought by providers in 2013 or 2014, at the prices of the time. This allows gas companies to agree a fixed price with their customers, and at least allows a degree of medium-term predictability. All of this is one reason why the 30% drop in wholesale prices since the recent peak are only now starting to have an impact. It takes time for price changes to filter through to consumers, because, as was just pointed out, gas and electricity are bought by providers in bulk in the past; in theory, it could easily take two years for the entire decline to be felt. EON recently announced that it would be cutting prices by 3.5%; British Gas a 5% cut, reducing the bills of 6m people by an average of £37 a year from February 27. By waiting a little longer, they was able to cut by more. Both firms are actually taking a risk: they are assuming that wholesale prices won’t bounce back immediately and permanently. Some believe the firms should have cut earlier. But if companies like BritGas start cutting prices by 1% every few weeks, they would also then have to start hiking them by 1% every few weeks when conditions reverse, as they will one day. Others believe that prices should be falling by more. But how? Wholesale only represents half or so of the total price of gas. Other costs include transport and distribution/maintenance costs (pipes, servicing of gas mains), which are going up partly as a result of increased spending by National Grid. Green tax, and other costs have also risen over the past few years.
Posted on: Wed, 21 Jan 2015 22:39:55 +0000
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