Energy costs

-------------------------------------------------------------------------------- As gas powers up and up, we face a future running on empty

The latest rise in household bills is just the start, says Neasa MacErlean. The search is now on for cheaper forms of domestic energy

Sunday February 25, 2001 The Observer

Gas prices are due to rise in April for the majority of the country's 20 million households - as a result of the first bill increases in five years. British Gas, which announced its annual results last week, will levy a 4.7 per cent increase on its 14m customers from 1 April - sending the average bill from £290 to £304. Many reasonably well-off people will shrug their shoulders and say 'It's only £14'. But many energy experts believe that this increase is merely the first step. Ilex, an independent firm of energy consultants, warned this month that prices might have to go up 10 per cent in the short term.

The Energy Contract Company, another independent consultant, believes that gas suppliers 'probably need to raise prices somewhere between 10 and 20 per cent' to break even.

The Peabody Trust - which provides low-cost housing in London for 19,000 people - has just conducted a survey to see if it can gradually switch its homes towards solar rather than traditional power sources.

The move is prompted partly by environmental concerns and partly by a desire to protect its constituency against rising gas costs. Energy availability is clearly becoming an issue again. Although we are not on the verge of another 1970s-style energy crisis, the Ministry of Defence is clearly worried that we could head that way unless we take preventative action.

Earlier this month, in an unprecedented exercise, the MoD published a report The Future Strategic Context for Defence which sought to outline worldwide threats to security - from scarcity of water to the spread of Aids to biological warfare - over the next 30 years. Gas availability was on the list.

The authors predicted that Britain's self-sufficiency in gas would soon come to an end, that we would be a net importer of gas within 10 years and would be importing 90 per cent of our gas by 2020. 'The main sources of supply will include Russia, Iran and Algeria,' it said. The MoD does not elaborate further, but the obvious implications are that we could be held to ransom by these states.

UK consumers have become used to falling gas prices in the last five years. When the British Gas monopoly ended in 1996, the entrance of new players helped drive prices down. There are now 16 suppliers, drawing virtually all of their gas from the North Sea.

But - as the MoD suggests - the North Sea gas fields could be dwindling. 'They are not finding bigger and bigger fields there, as they used to,' says Dr Sebastian Eyre of EnergyWatch (formerly the Gas Consumers Council). 'The new fields are getting smaller and smaller. It can only mean that prices will go up - unless there is more gas to be found.'

He is concerned about the people - between 3 and 5 million of them defined as 'fuel poor' because they spend more than 10 per cent of their income on fuel costs. Pensioners, in particular, can find it difficult to keep warm in cold spells.

There used to be price controls on what gas suppliers could charge to consumers. But the regulator Ofgem (Office of Gas and Electricity Markets) is planning to withdraw the last price control, on British Gas itself, in April.

The official Ofgem line is that competition alone will ensure fair prices. We will have to wait to see if that is a sensible analysis. Niall Trimble of The Energy Contract Company believes that the 16 gas suppliers are entering a different phase in their approach to consumers.

'They have been nervous about losing market share. So they have held off raising prices for a lot of time. They have been losing money very heavily for a year.' He estimates that the 15 newer players have lost between £200-£440 m over the last year.

A large part of their problem has been the working of the wholesale gas market. Although the UK has enough gas to be self-sufficient now, gas prices are set in a global market. When buying gas over the last year, UK gas suppliers have seen the price double. Prices on the Continent are index-linked to oil prices and are therefore very expensive and prone to volatility. Many people are concerned about the possible shortcomings of the European gas pricing mechanisms - and the EU is now conducting an enquiry into its workings.

Although most experts believe that UK consumers have seen all the price cuts on gas that they are going to get, they believe that many different outcomes are possible over the next few years. If oil prices go down, there will be less pressure on gas suppliers to raise consumer prices in a year's time when they next review consumer prices.

If the EU forces a change on the wholesale gas pricing system, the situation changes yet again. If Saddam Hussein is replaced in a few years by someone more friendly in Iraq, another explosive part of the equation will be reduced.

If Government colleagues read the MoD's report, they may try to go for alternative energy sources instead. Since it is difficult to store gas for any length of time, the UK will not want to have its gas supply switched off at three days notice from Russia, Algeria or Iran.

Environmental campaigning group Greenpeace acknowledges that the issue of replacing fossil fuel dependency with renewable energies has 'fallen down the political agenda' since the 1970s oil crisis - but it detects a greater interest from businesses for purely commercial reasons.

Spokesman Ian Taylor says: 'There seems to be a bit of a scramble going on to use renewable energy electricity because it looks as if it will be more price competitive.' Individuals, and businesses, can choose to buy electricity which is not produced from gas.

Perhaps now is a good time to start thinking about it. But it is also possible that some future government will start thinking about producing energy from cleaner and safer types of nuclear power.

Of savings - and hot air

Look at your method of payment. The cheapest gas prices go to those who pay by direct debit; the most expensive go to those who pay on a meter.

Consider changing supplier to get a cheaper deal. There are 16 suppliers in total. Comparisons can be difficult, however, since their charging structures vary widely.

Some have a standing charge; some charge only for usage. Some suppliers will offer discounts to people who buy both their gas and electricity from them.

Energywatch runs a free 'energywatch helpline' on 0800 887777. See also www.energywatch.org.uk and www.ofgem.gov.uk. Two non-regulatory but independent sites that are worth looking at are www.uswitch.com and www.unravelit.com.

Become greener. You can cut your long-term energy consumption by making some capital investments in your property now. Insulated roofs, more efficient boilers and long-life light bulbs will all bring costs down - although it can take some years to recover your initial outlay.

From 2003, people buying houses will get a pack including an 'energy efficiency report', outlining possible measures, from their surveyors. Information on the Home Energy Efficiency Scheme (including various grants) is available from the Energy Savings Trust on 0345 277200.

Think of alternatives to gas. Setting up your own windmill to produce energy is a bit awkward if you are living in a flat in Neasden - but the use of wind and solar power are now becoming more widespread.

Greenpeace recommends the website www.greenelectricity.org to those who want to buy electricity which is not produced from gas or other fossil fuels.

Don't forget the issue of service. Some new suppliers have been very poor in their service. And the Office of Fair Trading this month warned gas companies that they will be taken to court if their salespeople try to trick consumers into signing up to transfer gas suppliers.

Energywatch will give advice on complaints on 0845 906 0708.

http://observer.co.uk/cash/story/0,6903,442455,00.html

-- Martin Thompson (mthom1927@aol.com), February 25, 2001