Tesco hits out at high energy cost and Ofgem

Monday, October 13, 2008

Consumers are being hit by excessively high gas and electricity prices, Tesco has said, as it criticised Ofgem, the regulator, for not going far enough with the inquiry into energy markets it published this week.


Tesco feels that companies are paying too much for their energy, and is trying to drive its costs down as it and other retailers compete to cut prices.

The connection between the three prices is typically very close, but as oil prices have plunged since the summer, electricity and gas have remained stubbornly high, although the price of gas has fallen recently.

Lucy Neville-Rolfe, Tesco’s director of corporate and legal affairs, said: “We find that energy prices go up very quickly with the price of oil but are very slow to come down when the oil price falls. This is very costly and bad news for consumers.”

Gas prices in Britain have become more closely linked to oil prices in recent years. The decline of domestic gas production and the construction of new pipelines from Norway and the Netherlands has tightened the link to the Continental market, where the cost of gas is generally set by long-term contracts based on oil.


The price of gas in turn sets the price of electricity, because gas is generally the marginal fuel for power generation, used only when the price of electricity is high enough.

However, since the price of oil peaked in July, that link appears to have broken down, Tesco believes. Oil has dropped 44 per cent, but UK gas for delivery in the first quarter of next year has dropped only 18 per cent, and electricity for 2009-10 has also fallen 18 per cent.

Short-term problems with coal-fired power stations shutting in order to be fitted with equipment to cut pollution have pushed up the price of electricity for November, although it fell sharply Thursday.

The bigger issue is that prices for British buyers remain relatively high compared with Continental levels for the next two years in the futures markets.

Jeremy Nicholson, of the Energy Intensive Users’ Group, an industry body, said that put British industry at a competitive disadvantage. “For gas we are paying the same as Continental countries in the summer, and more in the winter, and for electricity we are paying more throughout the year,” he said.

Energy companies said there was always a lag of about six months between movements in oil and gas prices, so gas today could still be influenced by the run-up in oil in the spring.

They also said there was a premium in the gas price because of the low level of gas storage, which gives Britain a much smaller buffer against supply interruptions than most continental countries.

Some industry experts have questioned whether the wholesale gas and electricity markets are working properly. Niall Trimble of the Energy Contract Company said: “There is not really enough trading in the gas futures market, making it difficult for buyers to hedge their energy cost risks.”

Ms Neville-Rolfe described Ofgem’s report this week on energy prices as “a missed opportunity”, because it did not look into wholesale markets.

This story was featured on The Financial Times Website




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