Utility Week

UTILITY Week 20th June 2014

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28 | 20th - 26th June 2014 | utILItY WeeK Markets & Trading This week Market hedging is 'stopping bills falling' the big six seek to explain why low wholesale prices aren't feeding through into lower bills T he long-term hedging strat- egies used by the big six in the UK's energy markets are preventing energy bills from falling in the near term, accord- ing to the major suppliers. The energy companies were responding to a letter from Ofgem calling on them to explain to their customers what impact falling wholesale prices will have on energy bills. British Gas, which buys gas and electricity up to three years in advance, said its strategy meant movements in wholesale prices "do not feed through immediately to retail prices". Ian Peters, managing director of residential energy at British Gas, added: "We have other costs that are rising: regulated transport and distribution costs, environmen- tal costs, metering costs. "We are certainly not increasing profits on the back of lower wholesale gas prices – our trading statement last month downgraded profit expectations." Energy UK also stated that "it can take time for bills to catch up" with lower wholesale prices because suppli- ers can buy their energy years in advance. SSE chief executive Alistair Phillips-Davies also high- lighted rising non-wholesale costs, such as government- mandated schemes, and again called for these to be moved into general taxation. He added that, while wholesale energy prices had fallen for this summer, gas prices for this winter (2014/15) and the following winter (2015/16) "have not, in fact, reduced significantly". MB Gas Russia-Ukraine stand-off drives UK market prices higher Russia cut gas supplies to Ukraine on Monday (16 June), driving UK gas and power prices higher and highlighting concern about future supply disrup- tions. Such fears could limit the chances of the big six suppliers cutting consumer prices. UK gas prices for near-term delivery jumped 6 per cent on news that Russian energy giant Gazprom had halted supplies to neighboring Ukraine, aer Naf- togaz failed to meet a deadline for repaying the $1.95 billion (£1.15 billion) it owes. Ukraine will now receive only the gas it has paid for in advance, Gazprom said, adding that it had stopped deliveries with immediate effect. Analysts at RBC Capital said UK gas prices for near-term delivery traded up from around 37 pence per therm at the end of last week to 42-43p/th on Monday, while gas for delivery this winter jumped from around 58p/th to 61p/th. enerGY Independents have 'no plans' to cut bills Independent energy suppliers Ovo Energy and First Utility have no plans to reverse the retail price increases made in the first quarter of this year, despite the steady fall in wholesale power costs since then. Falling market prices for gas and power over recent months have prompted calls for the big six to cut their prices, with First Utility saying in a statement last week that it is "only right" for savings to be passed on to consumers. However, both independent energy providers told Util- ity Week they had no plans to reflect falling costs themselves. "First Utility is hesitant to speculate on future prices and does not have any plans to reduce the iSave Everyday tariff," a spokesman for the company said. The retailer lied its variable tariff by 3.5 per cent in February to take effect in April, but last week backed Ofgem's call for the big six to explain why bills had not fallen despite wholesale prices hitting four year lows. Ovo Energy said in April that its 2 per cent price increase was to reflect a jump in April wholesale energy prices, saying: "If we see a drop in things like wholesale costs or network costs we drop our prices like we did [in March]. If we see those costs increase like this month, we need to reflect that too." But Ovo also has no plans to pass on the recent market losses. A spokesman said: "We are keeping a very close eye on the [market] situation." Long view: energy bought years in advance Tricks of the trade Jillian Ambrose "For the first time in years CCGT is cheap to run" Plummeting wholesale gas prices haven't been bad for everyone. Sure, there have been warnings from the big six that annual profits may shrink, and warnings from consumer groups that their retail tariffs should too. But one unexpected winner to emerge from the rubble of the recent price crash is, oddly enough, the environment. For the first time in years gas prices are so low that generators would rather turn on a cleaner CCGT unit than opt for the now tive impact on the UK's annual emissions count. Not that you'll see an impact in the carbon market, though. Traders noted a small hit to UK demand for offset allow- ances, but ultimately this is not expected to be a long-term trend. Climate activists would do well to take a deep breath now – the change of pace may last through Q3 but the winter chill should bring a return to trend. If a Russian gas supply cut doesn't get there sooner. ubiquitous coal-burn. CCGT has been at the pricier end of the generation mix for so long that there's almost something a little extravagant about the idea of CCGT happily running through the night. But that is exactly what's happening. Government data for 2012 and 2013 showed the reign of Old King Coal at around 40 per cent of the UK's generation mix, while gas-fired power lagged behind at around 25 per cent. But for this summer, the reverse is true. And with con- ventional wisdom suggesting that gas generation emits half the CO 2 of coal-fired power, the switch is bound to have a posi-

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