Why are British Gas customers’ bills going up?

British Gas customers brace yourselves. From December 10 you will have to pay an average of £53 extra a year for gas and £29 extra for electricity.

But given this global gas glut that we keep hearing about, the question is why are prices about to rise?

The answer BG gives is that whatever is happening on the global scale, they are paying more now than they were last year for wholesale gas – 25 per cent more in fact. They are also paying more for extra costs like transportation and other overheads.

That explanation would certainly account for why Scottish and Southern Energy made a similar announcement last month. But what confuses the picture is that EDF have said they will keep their bills frozen over the winter.

Much of this has to do with buying practices. British Gas ties itself into large contracts a long way in advance – it says it cannot guarantee supply to its huge number of customers if it does not. But some analysts wish it would prove a little more nimble with its buying, and at least hedge its exposure to long term gas prices more successfully.

“It’s as if they haven’t heard of a derivative!” exclaims Nick Grealy of the No Hot Air website.

Of course, companies are not going to go into detail about their buying and hedging practices, but such policies can have huge impacts on the bottom line: just ask SSE.

That company this week announced a 6 per cent fall in adjusted profits. Included in that figure was an 11 per cent hit on generation and supply costs compared to the previous six months. But in the previous six months, that figure had shown a massive 128 per cent rise.

According to Ann Robinson, director of consumer policy at uSwitch, this was because of some clever thinking on the part of the CEO:

Ian Marchant had spotted that the bottom would go out of the wholesale market during the recession, so he started buying and selling on a short term basis.

Essentially, Marchant stopped buying such long term gas contracts and waited for gas prices to fall as demand collapsed before picking up the product at a lower price. British Gas would argue of course that it has too many customers to take such a risk – but of course SSE is no minnow either.

BG would also point out that it has made three price cuts in the last two years. Fair enough, except that while gas and oil prices have plummeted since the spike of 2008, bills have not.

Some are also wondering why BG couldn’t put off an increase until after the winter. Nick Grealy points out that with LNG imports starting to arrive in Europe from the US, the effects of the North American shale gas boom could soon be felt in lower gas prices here. Again BG points to its buying practices, insisting it cannot take risks with customers’ supply.

Such technical explanations are important. But they are unlikely to provide much solace when customers start receiving higher energy bills next year.

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