Wholesale prices for energy have eased away from the extreme highs of 2008, raising expectations of price cuts on gas and electricity in the UK. Consumer groups and the government alike have begun calling for a reduction in domestic gas and electricity prices, creating a widely-held belief that such cuts are imminent.

Yet while the hopes of such cuts remain alive, dark clouds have begun to gather which might result in the delay, reduction, or cancellation of any planned price cuts.

The Russian prime minister recently said that “despite the current problems in finances, the era of cheap energy resources, of cheap gas, is of course coming to an end.” Oil prices up on Russia’s announcement

In other words, the most powerful man in Russia is determined to keep high the price of his country’s energy resources. This determination is already being played out: using the pretext of a billing dispute with Ukraine, Russia last week cut off gas supplies to Ukraine. The unresolved dispute is significant, as Ukraine hosts a major gas pipeline that connect Russia’s gas fields with the west.

Quite predictably, the dispute has already resulted in major supply disruptions amongst many European countries, prompting a leading German supplier to state that its gas supplies via Ukraine had been “massively reduced”, going so far as to predict that deliveries would completely stop in the next few days.

But even beyond the current winter term, there are other powerful challenges which will translate into permanently high prices for gas and electricity.

The price of gas has historically followed the price of oil, not least because many oil fields also produce natural gas as a by-product. The world’s leading gas producers (Russia, Iran and Qatar account for 60% of world natural gas production) have over the last two years set up a new OPEC-style gas cartel. This new organisation will give its members the power to decouple the price of natural gas from oil.

The creation of a gas OPEC illustrates how energy-exporting countries have tightened their control over pricing in recent years, thus making a return to cheap energy highly unlikely. And because the UK uses natural gas to produce 40% of its electricity, prices there will continue to rise too.

The UK government needs to secure the long-term supply of energy to the UK, without sacrificing the environment. Renewable energy and nuclear power therefore loom large in the government’s energy policies. Creating clean new energy generation capacity is necessary, now that the UK’s own North Sea resources are declining. the extremely high cost of diversifying the UK’s electricity generation capacity will be paid for by the UK energy consumer through rising bills for decades to come.

After record price increases in 2006, energy suppliers in early 2007 trumpeted price cuts between 10-15% on the back of falling wholesale energy prices. But with 2007 wholesale prices off of their 2006 peak by as much as 65%, it is safe to say that suppliers made token (and short-term) price cuts only. The balance of the benefits found its way into the pockets of the suppliers, who all announced blockbuster profits in 2007.

The simple lesson is that there will be no letup to rising energy prices for the coming years if not decades:
- Those countries who give us our energy have gained control over the price at which they sell it.
- To reduce our dependence on energy imports and to generate clean electricity will cost astronomical amounts of money.
- Energy suppliers are businesses, not friends.

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