Rising gas prices blamed on dysfunctional energy market

When last month's cold snap reached its low point on 17 December, it sparked the single biggest day of demand for natural gas in nearly two years, as people turned up their radiators.

Yet, rather than triggering a similar spike in the gas flowing from Europe via the Interconnector the undersea pipeline that links European gas producers via a terminal in Zeebrugge, Belgium to Bacton, Norfolk the desperately needed gas from the Continent was piping in at just 12 per cent capacity. Instead of the full 20 per cent of the UK's gas needs it can provide, just 2 per cent trickled in.

UK power companies argue that such an anaemic flow is one of the prime culprits in rising customer bills, and that the dysfunctional European gas market is to blame. The wholesale price of gas has leapt by 105 per cent since the low reached last year, leading Npower last week to become the first power company here to push through hefty increases to its standard gas and electricity tariffs. Its rivals are expected to follow suit soon, with most analysts predicting an average 15 per cent increase to bills.

At a time when many of the most basic costs are rising, from bread and milk to petrol, higher energy costs will put more pressure on UK consumers just as the economy begins to slow. The Chancellor, Alistair Darling, last week requested a meeting with Sir John Mogg, the head of the energy regulator Ofgem, in an effort to better understand the link between wholesale prices and increases to customer bills.

Joe Malinowski of the price comparison site TheEnergyShop.com said that after the recent gas spike, most power companies will now be losing money on current tariffs as much as 25 per cent on their cheapest online deals. "All the dynamics are moving in the wrong direction now," he added.

This is not due to a shortage of supply. Within the past year, two pipelines, the Ormen Lange from Norway and the BBL from the Netherlands, have come onstream, vastly increasing, in theory, the UK's access to gas. A massive liquefied natural gas storage facility on the Isle of Grain also began operation, further adding to capacity.

The main problem, critics argue, is the UK's exposureto un-liberalised European markets. For their short-term supplies, companies on the Continent come to the liberalised UK market where the wholesale price is significantly less than the oil-indexed gas sold on the European market. Their short-term supplies met, the European groups then hoard their stored supplies, crimping demand and driving the price up further still.

Allan Asher, head of Energywatch, said Ofgem has also done little to protect UK customers. "There is absolutely nothing wrong with the infrastructure. This is about a failed market and a complacent regulator [Ofgem] that simply doesn't work for the welfare of Britain," he said.

Additionally, while 40 per cent of UK power plants are gas-fired, another 35 per cent of our electricity comes from plants burning coal, which has seen its price double.