September 21, 2018 / 2:59 PM / 2 months ago

Analysis: Soaring British winter gas prices point to energy price cap increase

LONDON (Reuters) - The upward trajectory of already unseasonably high British wholesale gas prices is showing no sign of slowing, putting pressure on the energy regulator Ofgem to raise its price cap next year.

A gas cooker is seen in Boroughbridge, northern England on November 13, 2012. REUTERS/Nigel Roddis/Files

A cap on default electricity and gas bills - a flagship policy of British Prime Minister Theresa May to end what she called “rip-off” prices - will be in place by the end of this year and can be adjusted according to changing costs such as wholesale energy prices.

Ofgem has said it wants to cap default energy bills at 1,136 pounds a year ($1,484), a level below the most-used tariffs set by the country’s big six suppliers, which include Centrica, whose British Gas is the largest household energy supplier in the country, SSE and EDF.

GRAPHIC: Northwest European gas storage levels here

The regulator will review the cap to take into account any changes in wholesale prices and associated costs such as network fees or policy costs such as environmental levies.

The first review will take place in February, with any changes to take effect in April, and soaring wholesale prices, particularly gas, indicate that Ofgem will need to hike the ceiling.

The February review will take into account wholesale prices from August to January, while the first cap level was based on prices from February to July.

“We don’t know what the wholesale prices will be for the rest of the year but even if they stay where they are that is still around 25 percent higher than for Ofgem’s previous review period,” Bernstein senior analyst Deepa Venkateswaran said.

“This would imply an increase of more than 100 pounds.”

Other analysts agree an increase is likely.

When the indicative cap level was announced on Sept. 6 Jefferies forecast that April’s increase would be around 77 pounds.

GRAPHIC: British winter wholesale gas contract price 2017 v 2018 here

A perfect storm of factors means that gas, which supplies around 80 percent of the country’s heating and around 35 percent of its electricity, is likely to stay high for rest of the year.

“Approaching the highest demand season, we continue to see a very tight European gas market, with the hangover of both the March cold snap and summer heatwave having driven down storage levels to multi-year lows,” said Richard Taylor, oil and gas analyst at Fitch Solutions Macro Research.

In February, a cold snap across Europe dubbed the “Beast from the East” sent British wholesale gas prices to 10-year highs as traders scrambled to secure supplies to meet high demand for heating.

Then, a summer heatwave across Europe, coupled with low wind power output and hydro levels ramped up gas demand from power plants during the months when storage stocks would usually be replenished.

Reuters data shows northwest Europe’s stock levels stand at 4-year lows at least for this time of year.

Britain’s gas storage levels are particularly low following the closure last year of its largest shortage site, Rough, leaving Britain more reliant on imports and vulnerable to spikes if major outages occur.

Reuters data shows the British gas contract for winter is already 15 percent higher on average this year than in 2017.

GRAPHIC: Asian spot LNG price V British NBP month ahead price here

New supplies could come from imports of liquefied natural gas (LNG), but if British and European markets want to attract LNG to meet demand this winter, prices also have to rise towards the Asian benchmark.

“Although we are only in September the perception is that Britain will need to attract some additional LNG and Yamal (in Russia) is the most likely place we will get this gas,” said Thomson Reuters gas analyst Oliver Sanderson.

Ofgem said it could not comment on the outcome of the February review but said it is designing the cap so that consumers pay only the real costs of getting gas and electricity supplied to their homes.

“If the cap level goes up consumers can be confident this reflects real increases,” an Ofgem spokesman said.

“If wholesale gas and electricity fall these savings are passed on via lower energy bills.”

Legislation to enable the regulator to set the price cap was approved by parliament in July, and although there have been differences on how the cap should work the idea of curbing high energy costs received cross-party support.

Although an election is not scheduled until 2022, May’s government remains fragile as she struggles to sell her Brexit plan.

All of Britain’s “big six” energy companies have announced price increases this year, blaming rising wholesale costs.

“The proposed cap, associated methodology and input data will require the most careful scrutiny,” Alistair Phillips-Davies, Chief Executive of SSE said when the first cap level was announced.

Centrica has warned against the price cap, saying it could stymie competition in the market.

The other big six energy suppliers are E.ON, EDF’s EDF Energy, Innogy’s Npower and Iberdrola’s Scottish Power.

($1 = 0.7653 pounds)

Reporting by Susanna Twidale; Editing by Louise Heavens

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