The government announced yesterday that it will require all households to have smart meters installed over the next decade. The decision was announced by the energy minister Lord Hunt of Kings Heath as the House of Lords debated the Energy Bill yesterday afternoon. The move to introduce smart meters - which will tell householders exactly how much gas and electricity they are using - was seen by peers as integral to the success of a new renewable energy feed-in tariff. Announcing the mandatory smart meters roll-out, Lord Hunt said: “This is a major step forward; no other country in the world has moved to an electricity and gas smart meter roll-out on this scale. “We anticipate a period of around two years to resolve the issues and to design the full detail of a domestic roll-out. Our aim is then to ensure that the subsequent roll-out happens over a period of 10 years. This would see delivery of smart meters by the end of 2020 to align with our renewables targets,” the minister went on to say.  The government plans to present an amendment to the Energy Bill at its third reading in the Lords, scheduled for next Wednesday (November 5), to make clear the legal powers needed to introduce smart meters. An impact assessment analysis is expected to be completed by the end of 2008 before the full details of a national smart meter roll-out are revealed. This analysis should provide up-to-date figures on costs and benefits, Lord Hunt told fellow peers yesterday.

Ministers are keen for smart meters to be rolled out as soon as possible, although details like how the initiative would fit with European free trade rules will have to be considered.

Consultations will have to be carried out to seek the views of both industry and energy regulator Ofgem before proposals are presented to Parliament, Lord Hunt said, adding that Secretary of State Ed Miliband is “keen to make rapid progress in this area”. Smart meters are not only critical for energy savings at home but will soon be inextricably linked with the feed-in tariff.  Baroness WilcoxLord Hunt concluded: “Once the details of a roll-out are drafted into licensed modifications, we must lay them before Parliament so that the complete design of the roll-out can be scrutinised.”

Yesterday’s report stage debate on the Energy Bill saw the government’s deputy chief whip, Lord Davies of Oldham, suggesting there were a number of options available for a national roll-out of smart meters.

It could see a centrally-planned programme carried out by companies awarded certain regional monopolies, with energy suppliers co-operating to allow the smart meters to be fitted. Or, it could take the form of a fully competitive metering market.

Lord Davies said: “The government are working with a range of stakeholders to define and evaluate various market models, and we expect to be in a position to reach final conclusions in due course as part of our broader work looking at the possible implementation of a domestic rollout.”

Conservative peer Baroness Wilcox, who prompted the government announcement on smart meters through a probing amendment to the Bill yesterday, welcomed the decision to bring in smart meters across the country.

She suggested the smart meters would be a step towards feed-in tariffs for small-scale renewable energy, where householders will be able to benefit from long-term contracts to sell excess energy to the grid at above-market rates.

Baroness Wilcox said: “Smart meters are not only critical for energy savings at home but will soon be inextricably linked with the feed-in tariff. The government are as alert as we are to the fact that we in this country are very late in protecting our energy supply and energy usage, but this concession by them is a great step forward.”

Oil prices have continued to fall on Monday, despite last week’s 1.5 million-barrel-a-day cut in production from oil producers’ cartel Opec. US light sweet crude for delivery in December dropped to a 17-month low of $61.30 a barrel before recovering somewhat to trade at $62.42. London Brent crude fell below $60 a barrel before recovering to $61.32. The falls have been blamed on worries about how much a global economic slowdown will hit demand for oil. “The mood is fairly negative reflecting worry about the international economic outlook,” said David Moore at Commonwealth Bank of Australia. “If there is further weak economic data in the US or Europe, prices could come under more downward pressure.”

Like other householders facing spiralling power bills, Colin Stone has made a series of alterations to his home to cut his energy costs. Yet he cannot turn his heating down, as his 14-year-old daughter Helaina suffers from an extremely rare genetic disorder, which means she suffers greatly from the cold in winter and heat in summer. It means daily hot baths in winter and air conditioning in the summer. As Colin put it: “It’s not a lifestyle choice, it is a medical necessity.” Two years ago, his monthly energy bill was £45. It is currently £72, with the next increase, due next month, likely to take it over £100. As his family makes sacrifices to the rest of its budget, Colin has no doubt who is to blame for the predicament facing millions of homes in the UK: “I think the companies are making excessive profit at the expense of the consumer. “The fuel companies are very good at putting the prices up and excessively slow at putting them down.” The energy companies blame the rises on factors beyond their control, mainly the rising cost of wholesale fuel used in power stations. It’s a problem exacerbated by the lack of spare capacity in the National Grid, with 20 to 30 power stations currently offline. However, one analyst also alleges that there is another, less-heralded factor.

Dominic Whittome, a former head of gas trading for a major energy supplier, believes the bulk of wholesale gas traded is in hidden deals, where the prices offered are never revealed to the markets. Traders buy energy on the forward market, buying at a specified price for future delivery. “I doubt whether more than 20% of the gas available is traded openly on the market,” he told BBC File On 4. These bilateral deals are traded away from the market, meaning the market does not know the exact price. “Furthermore, there is a lack of available gas for purchase on the market, because so much is traded ‘under the counter,’” he added.

“This creates a perception of traded gas scarcity, which pushed the prices up,” he said, adding, “Essentially it distorts or removes effective competition, which in any industry will lead to higher prices - and that, I believe, is one of the major reasons prices have risen 400% over the last 10 years.” Mr Whittome contends that wholesale gas prices could be cut by 10 to 20% if there were more free competition on the forward market. “If we did take action in the forward market, we could reverse a lot of the price rises that we have seen.”   I would say that in in the UK, the vast majority of gas is traded openly and freely

His claims are robustly disputed by Centrica, owners of British Gas. Sarwjit Sambhi, Centrica’s director of power business, doubts that 80% of wholesale gas is traded away from the market. “I would say that in in the UK, the vast majority of gas is traded openly and freely. There are very few off-market deals,” he said.

However, Mr Sambhi said a lot of gas was bought and sold in bilateral markets in Europe and added, “A more transparent wholesale European gas market would lead to a better understanding of why we’re seeing wholesale price changes up or down.”

A recent report by the Commons Business and Enterprise committee expressed concern about the low levels of visible trading on gas wholesale markets. Energy regulator Ofgem is currently investigating the problem.

As part of an inquiry which began in February, Ofgem has called on the big six energy suppliers to increase transparency in the wholesale markets, by publishing separate accounts for their supply and generations businesses. It is consulting on whether it needs new powers to combat potential wholesale market abuses. Ofgem declined a BBC request for an interview.

Original BBC News Article
 

Rising natural gas and electricity prices are creating an unexpected problem for businesses this winter, and another worry for the Bank of England. The expected opening of several new import facilities had prompted hopes that gas prices would fall. But high oil prices and delays to some important projects have pushed up prices for natural gas, and hence electricity because of the use of natural gas for power generation. A year ago, wholesale energy prices rose in the run-up to Christmas, and then fell back sharply in January and February. The same may well happen again this winter.  If it does not, then it is very likely that retail gas and electricity prices will rise. Centrica, the owner of British Gas and a price leader, dropped a heavy hint of that on Friday when it said: “The high wholesale prices will, if sustained, create a more difficult environment for retail energy suppliers in the UK going into 2008. We will continue to monitor this with regard to future pricing policy.” The worry for businesses, especially in energy-intensive industries, is that the balance of supply and demand is tighter than they had hoped. If we have an unusually cold winter, or there are supply disruptions, then the gas shortages and soaring prices of winter 2005-06 could be repeated. The immediate cause of the rising price of natural gas is the high oil price, which last week climbed back close to $95 (£47) a barrel. Natural gas prices in continental Europe are generally set on contracts linked to the price of oil products such as heating and fuel oil, so they follow oil prices, typically with a three to six-month lag.

Alexander Medvedev, the deputy chief executive of Gazprom, recently predicted European gas prices would rise by up to 17 per cent next year, simply as a result of the rise in the oil price.

That has meant higher prices for Britain, too. David Cox of Poyry, an energy consultancy, said continental gas prices tend to set a floor for UK prices, with a premium on top for weather risk. In addition, some of the hoped-for extra sources of gas supply into Britain have been disappointing. The two new terminals for importing liquefied natural gas at Milford Haven in Wales, South Hook and Dragon, are not expected to come on stream until well into next year.

The LNG terminal at the Isle of Grain has been used only intermittently, prompting Ofgem, the energy regulator, to ask companies whether they think there is a problem. Production from Ormen Lange, a Norwegian gas field that came on stream in October and is connected to Britain by the Langeled pipeline, has been growing more slowly than expected, as Norway’s national oil company StatoilHydro admitted this month.

The combined effect has been to push month-ahead gas and electricity prices to their highest level since the first half of 2006, adding to upward pressure on inflation. The Bank of England reckoned in last month’s inflation report that it was “more likely that retail energy prices will rise over time, rather than fall”. It warned that energy prices were one of the factors likely to keep inflation above target in the short term.

For energy-using businesses, higher costs are squeezing profits, but the effects are mitigated by the nature of energy price rises. British companies and their foreign competitors are all facing higher costs, and in many cases are able to pass on increases to customers. The real problems for business will come if British energy costs get out of line with those elsewhere, as they did in winter 2005-06.

Jeremy Nicholson, of the Energy Intensive Users’ Group, said: “We are not there yet, and fingers crossed we won’t be there. But the risk is significantly higher than we had been led to expect a few months ago.”

The vulnerability of British companies could be greater because more businesses have shifted to buying gas and electricity at spot or short-term prices.

Companies that might want to sign longer-term contracts are also put off by high futures market prices.

Jim Hempseed, UK-based energy director of Air Products, the industrial gases company that is a heavy user of energy, says: “My concern is next summer, where the forward price is about £49 per megawatt hour, compared to spot prices that averaged about £20 to £25 last summer. So we are faced by prices double what they were this year.”
Energies spent managing risk

Malcolm Lee of Sheffield Forgemasters International, a manufacturer of heavy engineering components, says he is not just managing energy, he is managing the company’s production costs, writes Ed Crooks.

As energy and commercial manager, he is responsible for buying the energy that accounts for about 20 per cent of the company’s production costs. But his greatest concern is that his ability to manage that risk in the market is disappearing.

For Forgemasters, a strong order book means higher costs can be passed on to customers. “We have a strong, buoyant market, and we are a very robust company, and there is an ability to pass that extra cost on. If you are a marginal company in a commodity business, though, you can’t pass it on,” he says.

However, profits are stillsqueezed by the delay in passing on higher costs, because contracts are typically signed for six to nine months ahead. “The energy price is not disastrous for us, but it does impact the bottom line all the time.”

His attempts to manage that risk have been hampered by a lack of liquidity in the forward market. “As prices started to rise in September and October, we started a damage limitation exercise, buying ahead,” he says. “But when we tried to do it a bit further forward, into January, February and March, it became very difficult.”

Very few sellers have been trading either gas or power in the wholesale market, he said.

“It has noticeably got worse since we came to the end of the summer,” Mr Lee said. “There seems to have been a bit of a sea change in how the market operates. If you try to fix forward, you can’t get a price.”
Keep costs down and homes warm

Beryl Barrett reprimands her five children when they neglect to turn the lights off or they keep the hot water running in her four-bedroom Croydon home, writes Ellen Kelleher.

The rising cost of electricity and gas is a burden and Ms Barrett, 40, struggles to find ways to keep gas and electric bills to £80 a month.

“I do everything I possibly can to save money,” she said. “When I was growing up, I had this habit of brushing my teeth and leaving the hot water running, which made my mother mad. Now I understand why.” Ms Barrett has pared back the cost of running her home by taking part in Warm Front, the government’s fuel poverty scheme. Her boiler was replaced last year with a more efficient one, resulting in yearly savings of at least £100. Since then, Ms Barrett has spread the word about the programme to friends.

She said: “I ask people I come in contact with on income support whether they’ve heard of Warm Front and they tend to say: ‘Oh yes, I received a leaflet about that’. I tell them to sign up for it. My house is a lot warmer now that they’ve taken out the old boiler.”

Russia, Iran and Qatar have agreed to form a powerful OPEC-style group for exporting gas. The consortium would control over 60% of the global natural gas reserves - and spark fears in the West that it could lead to higher prices. The news comes after a meeting between Gazprom chairman Alexey Miller, Qatar Energy Minister Abdullah Ben Hamad Al-Attiya, and Iranian Oil Minister Gholam Hossein Nozari. Talk about the creation of the group will send shivers down the spines of the United States and the European Union, which rely heavily on imports. The founders of any such group would be Russia, Iran, Qatar, Venezuela and Algeria. The United States and the EU fear an OPEC-style natural gas cartel would lead to a monopoly on supplies and higher prices. It’s estimated Russia holds around a quarter of the global natural gas reserves.

The move was immediately condemned by the European Commission (EC), amid fears that the trio could use gas as a political weapon. Russia accounts for about 20% of Europe’s gas imports. Officials from Russia’s state-owned energy company Gazprom met counterparts from Iran and Qatar on Tuesday [21 Oct 2008] to discuss the creation of a “big gas troika”. Alexei Miller, Gazprom’s chairman, said: “We are united by the world’s largest gas reserves, common strategic interests and, which is of great importance, high co-operation potential in tripartite projects. We have agreed to hold regular – three to four times a year – meetings of the gas G3 to discuss the crucial issues of mutual interest.” Meanwhile, members of the OPEC cartel, which controls about 40% of the world’s crude has recently announced a 1.5 million barrels per day production cut in order to put a floor under the tumbling price oil.

They are calling it by various names, whether it’s a Gas OPEC, G-OPEC, “Big Gas Troika”, Gas G3, or whatever. But the fact remains that this group will control a larger proportion of global natural gas production, 60%, than OPEC’s 40% proportion of global crude oil production. Canada’s natural gas issues aren’t exactly helping the Western cause either, with tar sands operations gobbling up rapidly declining gas reserves there.

In addition, as world crude oil production declines, and depletion rates soar (and NYMEX crude oil prices eventually catch on), there will be an increasingly larger reliance on natural gas and LNG as part of the hydrocarbon energy mix, a fact that the members of this gas OPEC are sure to capitalize on.

Ofgem has appointed British Gas Business as the temporary supplier of about 40,000 customers of Electricity 4 Business (E4B) after the independent supplier went into administration on Wednesday, the energy regulator said. British Gas, part of Centrica , will take over as “supplier of last resort” to E4B’s small business customers from 00:01 a.m. on Saturday after administrators PwC failed to find a buyer for the company, Ofgem said.

“We are working hard to ensure a seamless transition to British Gas Business for all affected customers and we will be contacting every customer to explain this,” Badar Khan, managing director of British Gas Business, said. Customers transferred to British Gas are free to negotiate new contacts or to switch to another supplier at any time but could face steep rises in their electricity costs until they do so. A spokesman for British Gas declined to say what charges the temporary customers would face, saying each would be told individually. “From our perspective the margins are relatively thin,” he said. “But it does provide a platform and safety net for those customers.”

“Any new market entrant without some sort of generation capability will really struggle because of the “vertical integration’ of a handful of power players preventing real price discovery and wholesale market liquidity.”

Electricity 4 Business, an electricity company which supplies 40,000 small businesses has gone into administration.  A buyer was unable to be found for Electricity 4 Business (E4B), which is based in Milton Keynes, energy regulator Ofgem confirmed. Customers will not be disconnected, but will automatically be transferred to another supplier in a process organised by the regulator. Customers’ tariffs may change, but they will be free to switch supplier. A spokeswoman for E4B said they would not be commenting on the situation on Wednesday.  The company had 140 members of staff, of which 100 were made redundant on Wednesday. The remaining staff will stay as the business is run down. Existing measures are in place for situations such as this. This will leave thousands of small businesses looking for new deals on their energy in an extremely volatile market.  Ofgem will invite other suppliers to take on the business’s customers before appointing a supplier. “This situation is very unusual but not unprecedented,” said Philip Cullum, deputy chief executive of watchdog Consumer Focus, formerly Energywatch. “Ofgem has robust procedures in place to make sure that that these very small businesses are not left high and dry without an energy supply.” An Ofgem spokesman said that a report regarding the future for customers would be released by the end of the week.  On its website, E4B says that it is aimed at cutting electricity costs for small and medium-sized businesses spending less than £10,000 a year on electricity. It does not produce electricity. Its customers include a number of sole trader businesses. They will be contacted by their new supplier. “It is disappointing that E4B is gone,” said a spokesman for the Federation of Small Businesses. “This will leave thousands of small businesses looking for new deals on their energy in an extremely volatile market. We would urge Consumer Focus to get involved immediately to ensure new deals offered to small businesses are fair.” E4B signed businesses on to relatively long-term contracts which allowed them to pay in regular instalments throughout the year. It bought electricity at wholesale prices, which have remained stubbornly high over the last year. “The decision by the directors of E4B to place the company into administration comes as a result of volatility in the energy market,” said Stuart Maddison, joint administrator and partner at PriceWaterhouseCoopers. “We will be working closely with Ofgem to ensure an orderly wind-down of the company’s activities and would like to reassure E4B’s customers that the administration will not affect their supply of electricity.”

We appreciate this may be a difficult time for E4B Customers, so if you would like help selecting a new supplier please contact us on 0870 710 7560.

Cheaper gas and electricity bills look some way off despite the falling price of oil. Oil has slumped to less than half the highs seen in July, helping wholesale gas prices fall around 20% since the record 100p a therm levels in the summer. But gas bought by Britain’s main energy suppliers like British Gas remains well above previous year’s prices. Gas for delivery during the first quarter of next year - one of the benchmark industrial prices - was trading at 80p a therm. This is up two-thirds from the 48p figure seen last year. Millions of UK households have been hit with two massive bill hikes this year thanks to soaring wholesale prices. Dual fuel customers of British Gas, owned by Centrica, now pay an average of £1,317 a year - £404 more than at the beginning of the year. British Gas owner Centrica said there was little prospect of costs coming down while gas remained so much higher than previous levels. A spokesman for the group said: “The falls from the absolute highs are welcome, but they are still running two-thirds higher than they were last winter which is the issue we are all facing.” Oil prices were trading at 71 dollars a barrel, more than 50% down from the 147 dollar high seen in July. According to industry experts, oil prices take around six months to filter through to domestic supplies.

Energy customers could be paying higher prices for gas and electricity used months earlier, the new watchdog Consumer Focus has warned. The six biggest energy suppliers have raised gas and electricity prices by up to 34% since the summer. But 16 million people could be charged a higher rate for energy used before the increase because of inaccurate estimated bills, says the group. The Energy Retail Association denies the industry is profiteering. Consumer Focus, which began work earlier this month, says about a third of customers will get estimated bills this quarter. “Based on that, consumers could be paying higher prices for gas or electricity used in the past, which for companies makes a very nice windfall,” Robert Hammond, of Consumer Focus told the BBC. The problem arises when the metre is finally read and a catch-up bill arrives. The Energy Retail Association said the industry was not profiteering from the practice but did warn customers not to rely on estimated bills. “It’s important to get a correct bill rather than an estimated bill,” said Gary Felgate at the Energy Retail Association. To do this the meter needs to be read either by a meter reader or by yourself, and preferably on the first day of the price rise taking effect, he added.

Despite the falling price of oil, cheaper gas and electricity bills still look some distance away. Since the record 100p a therm levels in the summer, wholesale gas prices have fallen around 20% as oil has slumped to less than half the highs seen in July. But gas bought by Britain’s main energy suppliers like British Gas remains well above previous year’s prices. Gas for delivery during the first quarter of next year - one of the benchmark industrial prices - was trading at 80p a therm today, up two-thirds from the 48p figure seen last year.  Thanks to soaring wholesale prices, millions of UK households have been hit with two massive bill hikes this year. Dual fuel customers of British Gas, owned by Centrica, now pay an average of GBP1,317 a year - GBP404 more than at the beginning of the year. British Gas owner Centrica said there was little prospect of costs coming down while gas remained so much higher than previous levels.  Oil prices were trading at 71 dollars a barrel today, more than 50% down from the 147 dollar high seen in July. Oil prices take around six months to filter through to domestic supplies, according to industry experts. Other factors which have kept wholesale prices high include the UK’s dependency on imports - currently running at 40% - increasing ageing platforms and stiff competition for supplies of Liquefied Natural Gas.  Volatile movements can also be caused by general market nervousness over what is seen as a dwindling resource. In August a leak on a major North Sea pipeline discovered by Norway’s oil and gas producer Statoil Hydro saw prices jump 14% in one day.