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Industry faces 90% increase in gas prices

>By Christopher Adams in London

>Published: February 16 2006 20:04 | Last updated: February 16 2006 20:04

Over the next few weeks thousands of British manufacturers who depend on natural gas for their energy will be haggling over new long-term contracts. By the end of February, industry experts say, the damage done to profit margins from this winter’s surge in wholesale gas prices will be clear.

While a political dispute has simmered for some time over higher household energy bills, the extra costs for industrial and commercial users have largely gone unnoticed.

In part, as ministers told members of Britain’s parliament on Thursday, this is because the mild weather in December and January proved wrong the “Jeremiahs” – a gloating reference to employers’ groups – who forecast power blackouts and four-day weeks.

The fear was that a combination of high prices and a shortage of stored gas would put unprecedented strain on the national grid during exceptionally cold weather, leading to shutdowns for some of the UK’s biggest industrial users.

That has not happened. But, as power suppliers and brokers warned on Thursday, the very real impact of higher gas prices is just around the corner. Many companies in the chemicals, plastics, paper, glass and construction industries, who are on long-term supply deals lasting a year or more, may be forced into paying 100 per cent more for their energy as they scramble to renew those deals or ditch them.

The spot price of natural gas spiked sharply higher on Thursday after a fire shut a storage platform in the North Sea and injured two people. Prices for delivery next week jumped 20 pence – or more than 40 per cent – to 70p a therm. This compares with prices of about 20p a therm three years ago.

E.on, one of the country’s biggest power suppliers with 14,000 industrial and commercial users, said it was settling new contracts at prices 91 per cent higher than a year ago. “Wholesale energy prices have just gone through the roof and most people do not believe they are going to come down,” the company said.

The reason for the scramble is that many manufacturers have to renew their contracts by April, the annual anniversary of energy market liberalisation in 1998, when they signed new contracts that typically last one to three years.

“People are going to get a shock. The degree of that shock depends on the length of contract that they are coming out of,” said Jonathan Elliott, head of business services at Energyhelpline.com, the internet broker. “Suppliers will be inundated with price requests.”

Companies on year-long deals could face rises of 30-60 per cent while those on three-year contracts could pay double. A quarter of contracts are up for renewal.

The effect goes beyond manufacturing to the retail and leisure sectors. Companies such as JD Wetherspoon, the pub retail chain, and Center Parcs, which runs family holiday parks, have also complained about the impact of energy price rises.

Sir Michael Darrington, managing director of Greggs, the bakers, told the FT it was suffering “significant increases” in costs and said the government had to tackle energy supply problems. The increase in gas prices, which have risen from just under 20p a therm three years ago to 70p, is partly due to how the gas market has tracked rising oil prices. It follows a decline in indigenous North Sea supply.

With the UK a net gas importer, industrial users complain that, until the European energy market is liberalised, they can expect little respite. Thursday’s publication of a European Commission report that accused EU-based companies of anti-competitive behaviour was therefore welcomed in London.

The report will do nothing for companies renewing contracts in coming weeks. Much more will depend on whether the efforts to increase competition will lead to adequate flows of gas to Britain through a cross-Channel pipeline at times of peak demand. Ofgem, the energy regulator, said the lack of transparency was continuing to drive up prices and could cost consumers an extra £3bn (€4.4bn) next winter.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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