Energy bills fall as British Gas fires first shot in price war

British Gas sparked an energy price war yesterday by slashing gas and electricity bills and promising further reductions later this year if the wholesale cost of gas continues to fall.

Gas prices are to drop by 17 per cent from 12 March while electricity charges will come down by 11 per cent. The move by the Centrica-owned company is certain to be matched by other big energy suppliers. Scottish & Southern and npower have already said they will follow suit and cut household tariffs.

British Gas said before Christmas it would cut prices this year for its 16 million customers, but it had not been expected to announce the reductions so early. The price cuts will bring down the average dual fuel bill by £167 to £953 for customers paying by cash or cheque. Households paying by direct debit will see the average bill fall by £154 to £874.

Centrica claimed this would make it the cheapest dual fuel supplier in the country, but according to the website simplyswitch .com even cheaper online deals will still be available from rival companies.

Wholesale gas prices have fallen by nearly two-thirds from their peak level in June as increased import capacity has come on stream, putting huge pressure on energy suppliers to pass on the savings to domestic customers.

Alistair Buchanan, the chief executive of the energy regulator Ofgem, said he expected British Gas's move to be the "first shot" in a renewed battle for customers. Ofgem recently published figures showing the former monopoly's share of the domestic gas market fell below 50 per cent last year for the first time.

The price cuts by British Gas will more than reverse the increases it pushed through in September, when gas bills went up by 12 per cent and electricity by 9.2 per cent. However, bills will still be a lot higher than they were at this time last year. British Gas announced an across-the-board increase in energy prices of 22 per cent in March.

Phil Bentley, the managing director-designate of British Gas, pledged that the price reductions announced yesterday would not disadvantage the 230,000 customers who signed up to a fixed-price deal only in November. These customers will be allowed to switch to the cheaper tariffs or a new deal which freezes prices until May next year with no penalty if they contact British Gas.

The company also announced a new social tariff for its 750,000 poorest customers which will reduce bills by a quarter or £285 for households using pre-payment meters.

Sam Laidlaw, Centrica's chief executive, said, despite the price cuts, the company would still be able to make a "sustainable margin" this year and fund further investment in sources of supply for the future.

In addition to new gas pipelines from the Continent, two new liquefied natural gas terminals are due to open in south Wales at the end of this year and early next year. This has helped bring UK gas prices into line with those on the Continent.