The Big Question: As gas prices rise again, are consumers being ripped off?

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The Independent Online

Why are we asking this now?

E.On and Scottish & Southern Energy are the latest energy companies to announce price increases. From today, E.On is raising gas prices by 26 per cent and electricity bills by 16 per cent. Scottish and Southern will push up gas prices by 29.2 per cent and electricity by 19.2 per cent. Substantial as these rises are, they are exceeded by the 35 per cent increase in gas prices announced last month by British Gas, the largest energy price rise in history. Average annual gas bills are now well over the £1,000 mark.

Why are they putting prices up?

The companies say they are reacting to developments in the wholesale market. This is a volatile sort of place, and prices have rocketed in the past few days because of problems with a gas pipeline supplying the UK from Norway. Worries about the gas pipelines running through Georgia to the West have not helped either. The wholesale cost of gas for delivery next winter has jumped by about 15 per cent in the past few days.

Is this going to be the last price increase?

Far from it. In fact, E.On and Scottish and Southern's price increases are the last of the second round of rises this year; a third round is expected in the next few months. In the longer term, we will all have to get used to higher energy costs, as emerging economies such as China and India push the price of every form of energy inexorably higher. Environmental factors will also lead to increased taxation, thus pushing up the cost of fossil fuels worldwide, for example through the EU carbon emissions trading scheme

As the House of Commons select committee on business warned in a recent report: "The evidence we have heard during this inquiry can lead to only one conclusion – that whatever short-term fluctuations occur, and whatever regulatory action is taken in the UK to improve the functioning of the energy markets, as the Minister of State for Energy, Malcolm Wicks, recently stated: 'The era of cheap energy is surely over'."

Aren't we self-sufficient, though?

Alas, no longer. Britain became a net importer of gas again in 2006 and the days of self-sufficiency are but a memory. Pipelines from Norway and Belgium, plus shipment of liquefied natural gas from Algeria and Qatar, now supplement output from the southern North Sea, which lands via the gas terminal at Bacton, north Norfolk. Gas has always been a little reluctant to make the journey to the coast, requiring huge jet engines to pump it, and there is less and less of it to bring ashore. At the moment, our own natural gas resources supply about two-thirds of our needs, but this will fall to about 50 per cent by 2010.

Where does that leave us?

Exposed, and cold. Britain relies on gas to heat about 85 per cent of homes and we also use gas to generate about 40 per cent of our electricity – a high figure by international standards. The Government's nuclear ambitions are unlikely to deliver much new capacity any time soon, and coal is ruled out because it is dirty. So gas, and more electricity imported form nuclear France, will be the answer.

What happened to all our gas?

We burned a lot of it to make cheap electricity, a fundamental shift in energy policy enacted by the Conservative government in the 1980s. Before that, under Labour's Energy Secretary Tony Benn, the great blessing of North Sea gas was protected by the "premium fuel" policy, which gave priority to the use of gas directly for domestic heating and for industrial use, with coal and, to a lesser extent nuclear power, earmarked for electricity generation. The miners' strike of 1984-5 and electricity privatisation in 1989 changed all that. Today, gas is still a (relatively) cheap and green way to produce electricity, so we have found new reasons to keep using it in our power stations.

Why are our prices going up more than other countries'?

The free market. Other nations, to a greater or lesser extent, still impose a degree of state control and their suppliers tend to look after domestic customers first. Britain has a much more liberalised energy market and its regulator, Ofgem, has kept a comparatively low profile in the recent controversies. That is one reason why the Chancellor, Alistair Darling, has had to order Ofgem to review the domestic energy market.

What will it do to inflation?

Drive it even higher, and at a rather awkward time. The latest round of price rises will add about 1 per cent to the Consumer Price Index, which is already running at twice the Government's target rate of 2 per cent.

The Bank of England estimates that inflation will peak at about 5 per cent this autumn, but how high it actually goes and how long it stays way above the target will crucially depend on the scale and timing of increases in domestic energy tariffs. The Bank has said that the outlook for inflation is unusually uncertain, and the volatility of gas prices is one reason why we may see inflation even higher than the Bank fears by the end of the year.

What about fuel poverty?

The Government's winter fuel allowance for pensioners, increased temporarily in the last Budget, protects some of the most vulnerable in society from voracious price rises but, unless that payment is increased and extended to families with children, as rumoured, fuel poverty is set to worsen.

Ministers have pledged to reduce to zero the number of people living in fuel poverty – that is to say those spending more than 10 per cent of their household income on heating. Energywatch, a consumer watchdog, says that more than four million households are fuel-poor, a figure that has doubled since 2004, reversing an eight-year decline.

What can we do about it?

Rather cheekily, Jake Ulrich, the former managing director of the British Gas owner Centrica, suggested that his customers might resort to wearing two sweaters this winter rather than one. Otherwise, you can apply for a Warm Front government grant ( www.warmfront.co.uk) to install central heating, double glazing or extra insulation in your home, or pay for it yourself. If you can get planning permission, a wind turbine will pay for itself in a decade or two, as will solar panels. Try shopping around (visit TheEnergyShop.com).

Are British energy users getting a raw deal?

Yes...

* Energy price increases usually bear little relation to wholesale market prices

* The energy industry regulator, Ofgem, is an ineffective organisation

* We have some of the highest fuel prices in the world

No...

* In the long-run, you cannot buck the energy market

* If consumers will not shop around for better deals, they have only themselves to blame

* Some providers say they are making a loss supplying domestic energy

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