Archives For author

by Tom Lyon

With the entire world’s media all focused on the sudden and dramatic fall of the News of the World after 168 years of publication, some are questioning whether British Gas might have seen this as a golden opportunity to bury bad news about price hikes.

But does today’s announcement represent damage control tactics on their part or simply one of life’s coincidences?  Ultimately only British Gas knows the answer but that shouldn’t prevent us from enjoying a few minutes of speculation…

As many, many people have said – mostly far smarter, wittier and more clichéd than me – hindsight is a truly wonderful thing and looking back there were a number of signs suggesting that today was a likely day for a British Gas price rise.

British Gas has been openly hinting at the need to put prices up for several months now, not least in a statement at the end of June when they indicated a 50% drop in profits in the first half of the year and the need for ‘retail margin recovery’, so we knew a hike was coming.

With this in mind, Centrica, British Gas’s parent company, will be announcing its half year results at the end of the month and this price rise needed to come before that to reassure shareholders worried about a fall in profits.

Add to that the trend that price rises tend to come on Fridays and we are down to a choice of two or three likely days in July.  The upshot of all this is, in hindsight at least, today was always one of the most likely days…

One other thing to bear in mind is the huge amount of work that goes into a price rise affecting this many customers  – I heard one industry-insider estimate that it costs suppliers around £1.5 million to change prices on their standard rates.

Whether this is true or not, it doesn’t take much to imagine the mammoth task of sending out millions of letters. British Gas, for example, has 9 million letters it has to print to send to customers, all dated and ready to start sending out on the day.  Now, the News of the World saga has been bubbling for a week or so but it only became huge news yesterday afternoon when its closure was announced.  In my view, anyone who thinks British Gas (or any other supplier) is capable of preparing for a price rise in less than 24 hours is totally off the mark and probably guilty of giving them a bit too much credit!

See Also:

Advertisements
libya-protests_022

Image by Crethi Plethi via Flickr

The world is in turmoil.  Egypt, Libya, Yemen and Japan, natural or manmade, rarely have we seen such frequent and diverse unrest.  While the impact of these events will be felt for decades to come by the people who live in these regions, the consequences will be felt in less direct ways much closer to home, not least following the impact this turbulence is already having on energy markets.  So will our bills go up and should we all be rushing to switch onto fixed tariffs to protect our prices?

Global unrest has caused dramatic increases in wholesale gas markets and it is looking more and more likely that this will impact standard domestic prices.  The relationship between wholesale rates and the prices we pay isn’t as direct as you might think; the majority of the gas and electricity you receive from your supplier is bought years in advance through confidential contracts.  In fact, suppliers only buy a minority of their energy on the open wholesale markets so it should be possible to control the impact on domestic prices.  That said, suppliers do purchase a non-trivial proportion of their energy in this way, they are facing higher costs than were forecasted and history tells us when suppliers face higher costs so do we.

The price increases we saw during the winter are fresh in people’s minds and it will be a very brave supplier who imposes further price hikes on its customers in the very near future.  Nor will they want to run the risk of having to push up prices twice in quick succession if they underestimate the impact, so increases towards the end of this year seem more likely, by which time markets should have stabilised.

In the meantime, we are already seeing a much more immediate impact on online and fixed tariffs which are being withdrawn from market at a dramatic pace.  EDF Energy, npower and SSE have all withdrawn their most competitive offerings in the last two weeks without introducing alternatives while fixed tariffs, particularly the cheaper ones, are also disappearing fast.

These tariffs are designed by suppliers, in a large part, to attract new customers.  This means they to need buy incremental energy over and above that which they have bought on long term contracts, for this suppliers look to trade on wholesale markets and as these costs here rise their margins erode and tariffs are withdrawn.

There are a range of fixed price tariffs still available, however, but are they the answer to our problems?  Will the protection they offer from price rises work out financially better in the long term?

To answer this, let’s first remember a few axioms of fixed products, risk rewards and protection costs.  Put another way, to guarantee the price you pay markets will typically set prices at a level which they expect will represent a premium against non- fixed products, across the term of the contract.

So does this mean that fixed plans are bad?  Well, in short the answer is no, for two reasons: first, suppliers and markets can’t predict the future and prices could rise faster than they forecast, meaning you are financially better off. Second, paying a little extra to have the peace of mind that you will not be face rising energy costs will represent its own value to many people.

If the security and protection fixed plans offer appeals to you, you then need to pick the right plan for you.

There are two key elements of fixed tariffs: the price and the length of the fix. The trade-off is the longer you want to fix your prices the more you will have to pay.  Tariffs range from three month fixes, costing not much more than cheapest online plan to four year fixes charging a premium in the region of £185.

Everyone has a different attitude to risk, but I tend to shy away from recommending short term (one year or less) fixed term products.  Here’s my reasoning… if I sign up to a one year fixed product today paying a representative £65 premium on the cheapest tariff in the market how much would prices need to go up by for me to ‘win’?  Let’s assume that prices go up in six months’ time (which seems reasonable), then they would need to go up by £130 per year for me to benefit enough in the second six months of the fix to outweigh the additional cost in the first year.  This is equivalent to a 15% price increase, which is higher than I expect to see this year.

Once you get past 1 year fixes, for example with npower’s Go Fix 5 giving you an extra 2 months fix, or EDF Energy’s fixed plan lasting all the way to 2015, things start to get more interesting. From this point it’s all down to your own preferences around risk.Do you want to be paying the cheapest prices available right now and risk future price rises or are you happy to pay more now in the hope that in years to come you could be protected from ever rising prices?  The choice, as they say, is yours.

See also:

News: How do wholesale prices affect our gas and electricity bills?

News: Customers told to hurry as suppliers pull their cheapest energy deals

A gas fireplace

Do we have enough gas?

The big news this week is that the National Grid has issued two Gas Balancing Alerts. GBAs are warnings that the demand for gas is coming close to exceeding the supply available. So where did it all go wrong, how are we coping and will your gas still be on tomorrow?

Two separate issues have combined to make Britain’s gas supply hit the front page news this week. First – and this won’t be a shock – demand for gas has rocketed due to the heavy snow and freezing weather. Secondly, our supply capacity was reduced when the Langeled pipeline, the biggest underwater pipeline in the world, suffered from technical issues.

Issues with the Langeled pipeline have led to a decrease in the amount of gas coming through the pipe from Norway, while Britain experienced temperatures as low as -18C yesterday, causing demand for gas to reach record levels.

These two events combined prompted the National Grid to ask 95 industrial high gas users, such as factories and power stations, to suspend their gas use temporarily.  Today this number has been reduced to 27, and all supplies will be fully resumed tomorrow.  Asking high gas users to switch to other fuels (such as oil or coal) is a standard mechanism the Grid uses to manage energy demand and is not a crisis measure.

So far the UK energy network is coping well with the technical issues and extreme demand, as it’s designed to cope with unexpected fluctuations. In the short term it’s very unlikely that domestic gas supplies will be interrupted, so you can have the heating on tonight after all!

Photo Credit: Kasia and Mike via Flickr