British Gas warns of big price rises in the pipeline

Centrica, the owner of British Gas, positioned itself to take the lead in an anticipated wave of gas and electricity rate rises from energy suppliers after warn-ing yesterday of "challenging conditions" in the wholesale gas markets.

The UK's largest energy provider used a trading update to warn that the price for gas in the wholesale market had risen significantly and that "if sustained, [will] create a more difficult environment for retail energy suppliers in the UK going into 2008". It added: "We will continue to monitor this with regard to future pricing policy."

The announcement comes just ten days after the company announced increases to its gas and electricity tracker tariffs. The warning was interpreted by market watchers as a clear sign that increases to the fixed standard and online tariffs were on the way a rise in those rates would affect the vast majority of its 16 million customers.

Most analysts are predicting increases next year of about 15 per cent for gas and electricity bills, due to the inexorably rising prices of natural gas and coal, which are used to generate electricity. Price rises will add to worries about rising inflation in the UK just as the economy is beginning to slow.

As the UK's leading energy supplier Centrica has 10 million gas customers and 6 million electricity users the company is typically the first to increase its rates, providing cover for its smaller rivals which then usually follow suit. Karen Darby, of the price comparison service SimplySwitch, said: "Historically, when one of the big suppliers increases prices, the others are quick to follow." She said that a 15 per cent increase would mean an extra 131 to annual energy bills.

"It's a question of who will go first. Centrica today has given a pretty clear indication," said an industry source.

Indeed, rival Npower followed Centrica's lead last week by raising its tracker rates for gas by 17 per cent and electricity by 13 per cent. No company has yet increased its standard, fixed rates. A spokesman for EDF Energy said yesterday that its "prices are continually under review". Scottish Power said: "It is a competitive market, and we are constantly monitoring our position."

Last winter, wholesale gas was trading at about an average of 37p per therm. That compares with 53p per therm now. The rising price is due to myriad factors, including the highly illiquid European market for natural gas, which has kept prices artificially high. The high oil price, against which many gas prices are indexed, and a cold weather snap are further factors. Production from the newly operating Ormen Lange gas field in Norway that has been less reliable than hoped for has further exacerbated the situation.

The watchdog Energywatch said that while wholesale prices may be rising, energy suppliers have been much less eager to pass on rate cuts as the wholesale price fell drastically earlier this year. Energywatch's Allan Asher said: "The apparent race to raise prices is in marked contrast to the industry's failure to act when it comes to cutting the burden of bills for consumers. In the last year, wholesale gas prices have fallen by 50 per cent and while the industry enjoyed the respite, they were in no hurry to share the benefits with consumers. Suppliers waited until spring this year to pass on miserly reductions to their customers of an average 15 per cent off gas bills and an average of 4.9 per cent off electricity bills."

Centrica said it had managed to end the year with about 16 million customers despite losing more than 250,000 early in the year after it raised its prices. Analysts expect the company to report a profit of between 1.8bn and 1.9bn when it reveals its annual results in February.