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U.K. Government Seeks Talks with Regulator Amid Rising Energy Prices7 Jan 08Hefty price hikes for residential power and gas users have seen the U.K. government seek out talks with energy regulator Ofgem, raising the prospect of a regulatory response.
Unhappy New Year U.K. energy supplier Npower, a division of German company RWE, has issued an unwelcome New Year surprise, announcing hefty price hikes for its four million U.K. customers. The company said on Friday (4 January) its average gas bills would rise by 17.2%, while electricity bills would rise by 12.7%, effective immediately. Npower argued the hikes were necessary as a result of the increasing costs of purchasing energy on wholesale markets, stating that the wholesale costs for gas had increased by up to 60% over the past year. Separate price increase announcements from the United Kingdom's remaining five main energy suppliers are now expected in the coming weeks. Government Attention Drawn Spurred on by significant public concern, the U.K. government is now moving to investigate the rationale behind the announced price increases. Chancellor Alistair Darling has sought out a meeting with energy-sector regulator Ofgem to discuss whether the price hikes are justified. In a letter to Ofgem chief Alistair Buchanan, Darling said he would "be interested in receiving [Ofgem's] assessment of gas and electricity supply and market conditions, both in the U.K. and Europe, and likely future trends." Relating the matter back to Npower's stated reasoning for the price increases, the Chancellor indicated he was particularly interested in Ofgem's views on the relationship between wholesale price movements and feed-through to domestic retail prices. Outlook and Implications The government's obvious interest in the matter raises the prospect of some form of regulatory response to the price rises. Several other European governments have sought to crack down on escalating energy costs in recent times. Last month, the German government passed legislation designed to improve pricing transparency in the energy market by requiring utilities to disclose their costs and calculations if gas or power prices are deemed excessive (see Germany: 2 January 2008:German Competition Regulator Launches Inquiry into Gas , Power Price Rises). However, the United Kingdom—unlike the vertically integrated structure of the German market—is generally considered to have one of the most competitive energy markets in Europe. As such, U.K. energy company claims that price rises are driven by market conditions are likely to hold greater legitimacy than their European counterparts. Indeed, it is becoming apparent that the United Kingdom is now having to adjust to a changing environment in terms of the cost and security of its energy supplies. Depleting North Sea oil and gas fields are no longer able to meet the country's energy needs, leaving the United Kingdom with an increasing reliance on external suppliers. The development of new import-export infrastructure between the United Kingdom and the continent has further exposed the country to the regional European market. With the rising cost of oil over the last 12 months driving up oil-tied gas prices, and with gas supplying 40% of U.K. generation, the wholesale power market has suffered the flow-on effects. The question that will be in the Chancellor's mind during his discussions with Ofgem will be whether the tightening wholesale market warrants the level of end-user price rises announced by Npower. Ofgem's answer to this question may well dictate whether the recent announcement sparks a more fundamental review of the structure and regulation of the U.K. energy market. At a minimum, energy companies can be assured that the government will now be casting a careful eye over future energy-price increases. |
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