August 10, 2018 / 11:38 AM / 4 days ago

Explainer: Why UK energy firms are upping prices while government fights to keep them down

LONDON (Reuters) - An increase in wholesale energy prices pushed Britain’s Centrica to announce its second price rise of the year this week even as regulators prepare to cap prices to help millions of households struggling with rising costs.

FILE PHOTO: Electricity pylons are seen in London, Britain August 1, 2017. REUTERS/Neil Hall/File Photo

All of Britain’s top energy suppliers have increased prices since Prime Minister Theresa May lashed out at what she called “rip-off energy prices” last October and pledged to cap prices in the biggest market intervention since privatisation almost 30 years ago.

Wholesale gas prices spiked to their highest level in at least 10 years as the country was hit by a cold weather snap dubbed the beast from the east in February, while the heatwave felt across the country this summer has also led to higher than usual demand for electricity.

Academics said British demand for electricity rises 350 megawatts (MW) for every degree the temperature rises above 20 degrees Celsius, a frequent occurrence in recent weeks, while lower wind speeds curb power output from the country’s wind farms.

Regulator Ofgem will cap prices on the most widely used standard tariffs (SVTs) by the end of the year, but experts warn prices could continue to rise ahead of the cap if wholesale prices, which make up almost 40 percent of a bill, continue to remain high.

“We cannot of course rule out further SVT price rises, given the trajectory of commodity price changes,” analysts at Bernstein said in a research note.

Reuters data shows average day-ahead wholesale gas prices in the first half of 2018 were almost 30 percent higher than over the same period last year, while the average day-ahead electricity price was around 20 percent higher.

“This is mostly due to the global rise in oil prices feeding through to wholesale gas prices which impacts both domestic heating and electricity generation,” Ofgem said this week as it announced it would allow suppliers to raise prices for the most vulnerable customers.

Average benchmark Brent crude oil prices in the first half of 2018 were up almost 35 percent on a year earlier.

Although British energy users pay less per unit for electricity and gas than those in most western European countries, including Germany, Italy and Spain, according to Eurostat data for the second half of 2017, Ofgem says the cost of supplying Britain’s near 28 million homes has soared.

Intervention in a free market is an unusual step for Britain’s ruling Conservative Party, and indeed the idea of capping prices was first floated by the opposition Labour party before the 2015 parliamentary election.

But May made a promise upon taking office in 2016 to help poorer Britons who are “just about managing”, many of whom vented their frustration with years of low earnings growth by voting for Brexit two years ago.

Utilities have denied overcharging, but the Competition and Markets Authority found they had overcharged some British households a total of 1.4 billion pounds ($1.75 billion) a year on average from 2012 to 2015.

The government launched a campaign to persuade consumers to seek out the cheapest deals by switching tariff or supplier but the majority of households remain on SVTs which can be as much as 200 pounds a year higher than other deals offered by the same supplier.

All of Britain’s “big six” energy companies have announced price increases this year. The others are SSE, E.ON, EDF Energy, Innogy’s Npower and Iberdrola’s Scottish Power.

The closure last year of Rough, Britain’s largest gas storage site, also means there is less gas in reserve when demand spikes happen, like during last winter’s cold snap, forcing the country to rely more on imports.

A weaker pound makes imports of products such as liquefied natural gas (LNG) priced in dollars more expensive.

Around 80 percent of British homes are heated by gas, while about 40 percent of Britain’s electricity comes from gas-fired power plants so high gas prices have a knock-on effect.

Higher environmental levies such as carbon costs have also lifted electricity prices this year.

Britain’s fossil fuel power generators are subject to two carbon emission levies, the European Emission Trading System (ETS) and the domestic carbon floor tax.

With cuts in the supply of carbon permits expected from next year, prices in the ETS have more than doubled in 2018 to around 17.50 euros ($20.29) a tonne, which must be paid on top of the domestic tax which is currently around 18 pounds ($23.19) per tonne.

($1 = 0.8624 euros)

($1 = 0.7760 pounds)

FILE PHOTO: Electricity pylons and a cooling tower from Eggborough power station are seen above a farmers' field in Kellingley, Britain August 1, 2018. Picture taken August 1, 2018. REUTERS/Phil Noble/File Photo

Reporting By Susanna Twidale; Editing by Kirsten Donovan

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