The last twelve months have been an annus horribilis when it comes to energy prices. The first big jumps came in January then there was a huge tranche of in some cases 30% plus rises around August.
As I explain in the Compare Gas & Electricity guide one of the major ways to prevent your bill for much of this year has been to cap, which means fix your rate to guard against future rises. The problem comes when you pay a lot more to cap than you would sticking with the standard cheap tariff. The only true way to get it right every time is if you KNOW what’s going to happen to energy prices.
Sadly, short of a crystal ball, that knowledge doesn’t exist; yet I’ve been speaking to a few people in the industry (special thanks to Mark Todd at Energyhelpline), and wanted to write a brief note on what the expected outcome is. Bear in mind though, even this is just a back of the envelope type of thing, and could be wildly inaccurate.
First you need to understand why prices are rising.
Of course utility companies like raising prices and increasing profits, but the underlying cause is the rise in the cost of wholesale gas – the price the energy companies buy it for.
The important measure here isn’t the current price, it’s the ‘winter price’ as that’s what’s generally referred to, and people sell ahead.
This means the price rises we’ve had so far aren’t enough!
As you can see the rise has been huge, and even our painful 50%ish rise in consumer prices is actually smaller than the doubling of the wholesale rate. Though some of this rise was factored in to earlier consumer price rises.
As the energy companies have said they want to “maintain margins” this means it’s possible we’ve more price rises to come so consumer prices can catch up.
Unless there’s a drop in the price of a gas therm, i.e. it goes back to 80p, then we are likely to see our energy bills increase in January. It’s unlikely to be sooner as we’ve just had a price round, and they don’t put prices up pre-Christmas for fear of being called a Scrooge.
Of course political pressure could be brought to bear, or even the threat of introducing a windfall tax, which may make the utility companies a little more fearful of further price hikes. In which case they’ll analyse whether it’s more cost effective to raise the prices and pay tax, or just take the hit themselves and not raise prices.
You may be wondering why I’m focusing on Gas prices and not electricity. The reason’s simple, the electricity price is more complex and depends on the price of oil (which has also gone up) and the price of gas, so the wholesale gas price tends to be the lead indicator here.
What about further in the future?
Beyond next January we really are in uncertain territory. Currently the market predictions are for prices to dip slightly for winter 09, but only by a few percentage points, nothing that will change the landscape too dramatically.
Yet this could change one way or another. There’s been no real reason for the wholesale prices to be so high, no physical change, it’s just market conditions, and because of this some think they’ll drop again, while others simply say the days of cheap energy are over.
What no one seems to be predicting is yet more big hikes after next Janaury, which, if they’re right (and of course there’s no guarantee) means that paying a substantial premium for a long term cap doesn’t look to be as good value as paying a small premium for a short cap.
(Any gas & electricity industry experts or traders, your thoughts would be welcomed)