Big energy price increases likely

Talk of 40% price increases has angered many MPs
Big increases in gas and electricity bills are likely this year, leading energy suppliers have confirmed.

Bosses of the big six energy firms have been answering questions about prices from MPs on the parliamentary business and enterprise select committee.

Sam Laidlaw, the chief executive of Centrica, which trades as British Gas, said it was "clear that gas prices are going to have to move up".

Ian Marchant of SSE acknowledged that prices might rise by as much as 40%.

Rupert Steele, director of regulation at Scottish Power, said: "The whole industry figures will have to rise significantly."

Their comments came as MPs on the committee asked them to defend the big increases in gas and electricity prices facing households and businesses in the UK.

"We are seeing a seismic shift in commodity prices," said Dr Paul Golby, chief executive of E.ON.

"It's not difficult to see that the pressure is upwards," he added.

Price pressures

Domestic suppliers are under pressure to explain pricing intentions after the BBC learnt that household energy bills could rise by up to 40% this winter.

Our absolute price levels are currently the lowest in Europe

Sam Laidlaw, chief executive, Centrica

Industry sources have suggested households could pay £400 more a year on average for gas and electricity.

"It is easy to see how you get to the BBC's figures," said Mr Steele for Scottish Energy.

The wholesale gas price is closely linked to the price of oil, which itself hit a record high of just under $140 a barrel this month.

Industry research has suggested wholesale gas prices have risen by more than 70% in 2008.

Last month, Centrica - which owns the UK's biggest energy provider, British Gas - signalled that gas prices for customers could increase again later this year.

Bur Mr Laidlaw said: "Our absolute price levels are currently the lowest in Europe."

"As we import more gas from continental Europe, we are having to pay higher prices," he explained.

Both Scottish Power and Scottish and Southern Energy pointed out that they had to buy all their gas on the international markets, as they do not produce any gas or oil in their own businesses.

New power stations

It has been suggested that the energy market is in effect "rigged" by long-term contracts for the supply of gas and electricity involving the big European energy producers, who are accused of excluding any competition that might drive prices down.


Centrica was among the companies giving evidence to MPs

Vincent DeRivaz, the chef executive of EDF Energy, denied this, although he admitted the markets for wholesale gas and electricity could work better.

"The market can be improved," he said.

"In the gas wholesale market, there is some improvement to be made."

The industry executives surprised some of the MPs by arguing that they needed more financial incentive to invest in building new power stations.

Despite the record high prices of oil, gas and electricity, Andrew Duff, the chief executive of Npower said: "We are in a very difficult transition phase where the forward returns barely cover the cost of the investment."

He explained that his firm would have a negative cash flow for many years to come because of the cost of such expenditure.

Dr Golby, of E.On, pointed out that 60% of UK generating capacity needed to be replaced during the next 20 years.

And Mr Laidlaw said it was not fair for him and his rivals to be described as "fat cats".

"The average profit margin is 3.5% in the industry," he said.

Fuel poverty

MPs also pressed energy chiefs on the extra help being given to low-income and disadvantaged households to help them with the impact of rising bills.

Watchdog Ofgem, which is conducting its own inquiry into the market, outlined plans last month to share data on people on low incomes with energy companies to help people pay their fuel bills.

The proposals, which must be approved by Parliament, are designed to ensure that financial assistance for fuel payments can be better targeted at the elderly and vulnerable.

The government estimates that 2.5 million households are in fuel poverty - defined as when more than 10% of household income is spent on fuel bills - but watchdog Energywatch says the figure is more than four million.

A 40% rise in average fuel bills would be far higher than expected and would put more pressure on homeowners already struggling with higher food and fuel costs.

However, some analysts believe the increases will be closer to 25%.

It is thought that any price announcements are most likely to come in August, when energy bills are not at the forefront of people's minds.

But there is a great reluctance in the industry to be the first to reveal a big rise, so the rises may be unveiled in stages.

The chief executives of Centrica, Scottish & Southern Energy, NPower, EDF Energy and E.ON UK attended the meeting, while Scottish Power was also represented.