Energy costs squeeze ups pressure on consumers

Soaring household bills and record petrol prices are just the beginning of an austere start to the new year

By Sarah Arnott
Tuesday 14 December 2010 01:00

As if unseasonable cold and looming public spending cuts were not gloomy enough, Britain's beleaguered consumers are facing a barrage of rising energy prices from domestic gas bills to petrol station forecourts. And there is worse to come.

Npower became the latest of the "big six" energy providers to hike its prices last week – taking electricity and gas tariffs up by an average of 5 per cent in the new year – following similar increases from British Gas, Scottish Power, and Scottish and Southern Energy in recent weeks.

But it is not just householders who are facing a wallop in the wallet from energy bills. As of yesterday, Britain's motorists are paying a record 122.02p for each litre of petrol and 125.95p per litre for diesel.

One factor common to both the fuel industry and the household gas and electricity sector is the oil price. The global oil market has been rising consistently from the crisis-hit low of around $40 (£25) per barrel at the end of 2008 and is now around the $87 mark, pushing up both pump prices and wholesale gas costs.

And with investors already speculating about a return to $100 oil, and the 12-strong Opec producers' cartel last weekend voting to keep in place production restrictions originallydesigned to put a floor under therecessionary price collapse, there is no let-up in pressure in sight.

But the underlying oil price is just one issue affecting Britain's petrol prices. A whole host of short-term factors also played a part in the recent spike, including Europe's cold snap, President Obama's decision to extend the Bush-era tax cuts, and the weakening pound in the aftermath of the Irish bank bailout.

"It really is a bleak midwinter for Britain's motorists," Luke Bosdet, the public affairs spokesman at the AA, said. "And the key medium-term question will be whether drops in wholesale prices expected early next year are actually passed on in lower pump prices."

The Government must also bear some of the responsibility for the current spike. Since April alone, petrol duty has gone up by 2.76p, adding 3.24p per litre once VAT isincluded. It is set to rise by another 0.76p per litre from 1 January.

Once VAT is added, and the extra from the 2.5 per cent hike in VAT itself, drivers are looking at another 3.5p per litre rise from the new year. The fuel tax escalator is then schedule to send it up by another 1p plus inflation in April.

Motorists are already reacting to the extra expense. Consumption dropped by 6 per cent from 2008 to 2009, and has fallen further this year, according to AA estimates. But much will depend on the performance of the economy, and the effect on exchange rates.

"It looks like things could get worse," Mr Bosdet said. "But if the austerity programme works, and the pound rises and absorbs some of the extra wholesale prices, then there's a chance it could be a different story."

Household energy bills also see a hike from rising oil prices. But gas and electricity costs are much more sensitive to the weather – this month's freezing temperatures have sent European wholesale gas prices 50 per cent higher compared with last spring.

And the slew of extra costs that UK energy suppliers face in both their retail and generation businesses is setting a longer-term trend of rising prices.

Britain's generating capacity needs an eye-watering £200bn over the next decade, for everything from new nuclear power stations toexpanded gas storage capacity, to help meet carbon reduction targets. The Government's proposed energy-market reforms – designed toencourage the necessary private sector investment – are due this week. Whatever the details of the proposals, the measures will feed through on to customers' bills, with some estimates as high as an extra £500 per household per year by 2020.

Meanwhile, energy companies'retail divisions are also seeing costs ratcheted up by the carbon emissions reduction targets. The home insulation programme alone isexpected to cost the industry up to £1.5bn next year.

All in, the regulator, Ofgem has said bills could rise by up to 25 per cent within 10 years, an estimate echoed by energy company bosses last week.

Regardless of the long-term pressures, the recent round of price hikes has raised howls of protest from consumer groups outraged at supplier profits. Just days after British Gas's 7 per cent price rise, for example, its parent company Centrica upped its full-year profit forecasts to slightly more than £2.2bn, helped by theretail arm's record £585m profits in the first six months. The company played down the upgrade – citinginterest and tax charges not reflected in the predictions, and pointing out that British Gas has been selling gas at a loss in recent months. But Ofgem estimates profit margins across the industry have shot up by nearly 40 per cent since September, and it has launched an inquiry into whether energy companies are "lining their own pockets", in the words of the chief executive, Alistair Buchanan. Even in the short term, prices are unlikely to fall back from the current weather-related spike. "When the weather gets warmer again, wholesale prices will fall," Joe Malinowski, founder of, said. "But that's not to say we'll see a comparative fall in retail prices, because suppliers tend to hedge forward on a 12 to 24 month basis."

Altogether, consumers face a tricky start to 2011. Rising energy prices helped boost consumer price inflation (CPI) to 3.2 per cent in October, way above the Bank of England's 2 per cent target. Not only are the November figures published today not expected to show any improvement. Analysts at Capital Economics are predicting CPI will go up as high as 3.5 per cent in the first couple of months of next year, boosted by the new year VAT rises and fiscal changes such as the increase in National Insurance contributions.

Samuel Tombs, a UK economist at Capital Economics, said: "Wage growth has been negative in real terms over the last two or three years, and if you add the fiscal squeeze, consumers will be hard hit, particularly in the early part of next year."

Petrol decoupled

* In the run-up to the financial crisis in 2008, UK petrol prices tracked the oil price. Not any more. At around $87 per barrel, oil is still more than 40 per cent down on the highs of $148 in the summer of 2008. So how come pump prices soared to record highs at the weekend and have carried on rising? The weakness of the pound, at least against US currency, is a major factor in the rise, given that both wholesale petrol and crude oil are denominated in dollars. A series of increases in fuel duty in the intervening years have also proved key. "There is a totally different dynamic behind the current record petrol prices," said Luke Bosdet of the AA, the motoring organisation.

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