As energy bills go up, commentators predictably blame a lack of competition in the British energy market. But they need to take a hard look at what drives the energy price. We’ve had hundreds of years of self-sufficiency, and today that has changed radically. We no longer enjoy a wholesale market “awash with gas”; we are competing globally with countries such as Japan and North Korea, and those on a north European gas network. Seven years from now, we’ll be importing at least 75% of the gas we need. To get this gas we have to compete on price terms with European energy suppliers who are buying under contracts directly linked to the price of oil – which has risen by 80% since early 2007 to $108 a barrel. The wholesale gas price has risen sharply in response. The time-lag of pricing mechanisms in Europe means it may be higher in the winter. Price volatility is also intense. In 2007, wholesale gas prices fell to 13p a therm then swung to a record high of 60p within months. Current prices for summer 2008 are at unprecedented levels, more than 45% higher than this time last year – and yet despite this, gas has not been flowing into the UK when high prices should have attracted it in. Until EU energy markets are truly liberalised, they will continue to adversely impact wholesale prices in Britain. Europeans will take gas from the UK but may not be able or willing to deliver it back when UK prices warrant it. The challenge for British Gas and its rivals is to minimise the impact of these wholesale price swings, to maintain profitability to fund the continuing secure provision of the gas and power which customers need, and yet to remain competitive enough to give them the best deals. In March and April 2007 we cut prices twice, by a total of 20%, but by the summer wholesale prices were rising, which cut margins to 1% for the second half of 2007. British Gas would have lost money in the first half of 2008 if it had not raised prices in January. That wholesale figure, which all suppliers have to pay, is the real driver behind price changes for consumers, representing 50% of the total cost to the customer. Using National Grid pipelines to get the gas around the UK accounts for about 20%, an operating costs account for about 11%. The remaining 18% is made up of environmental subsidies, metering costs, tax and profit. But over the past six years, British Gas’s profit has accounted for an average of just 3%.

So swings in the wholesale price of well over 50% are vastly more significant in relation to what customers pay than a movement of a couple of percentage points in retail price margins. There is no evidence to suggest the increase in wholesale market prices is driven by anti-competitive behaviour, and all the key measures of retail competitiveness – pricing, product innovation and switching rates – suggests energy retail markets are also functioning effectively. Since 2001 there have been numerous investigations into the market by Ofgem, the DTI and the EC. All have consistently found no evidence of
anticompetitive behaviour. A recent report for the government from Oxera, an independent energy consultancy, concluded that “the UK energy market is the most competitive in the EU and G7 … UK consumers have consistently benefited from amongst the lowest energy prices in Europe”. Official statistics show the domestic gas price in Britain for medium consumers was the lowest in the EU. A lot of these benefits stem from investment in new customer products. For instance, fixed or capped prices and green products help drive competition as firms seek ways in which to protect their customer base. About 4.2 million British households have chosen new ways to buy their energy, ranging from online tariffs to fuel protection packages for vulnerable customers. This level of competition has delivered some of the highest switching rates in the sector. Ofgem says a record 5.1 million people changed provider in 2007. In the less liberalised markets of Europe, things are different. In Germany only 9.2% of domestic electricity customers switched in 2007. The UK’s switching rate of 55% is far higher than the second most competitive market in Europe – Sweden, with 32%. Healthy competition is a vital element in securing billions of pounds of investment in new energy supplies for Britain and delivering innovative products to customers. Those who fail to see this bigger picture need to take those blinkers off. Sam Laidlaw is chief executive of Centrica, British Gas’s parent company

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