Photographer: Chris Ratcliffe/Bloomberg

U.K. Homes Spared Energy Hikes for Now Even After Price Jump

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  • Spot U.K. gas prices surged as much as 46% to four-year high
  • Suppliers may still lift consumer bills if high prices persist

Britain’s households may be safe from rising energy prices for the moment even after pipeline outages and a cold snap sent natural gas soaring to its highest in four years.

This week’s closure of the Forties pipeline in the North Sea and an explosion at a natural gas hub in Austria pinched supplies and boosted wholesale prices in the U.K. as much as 46 percent. But the biggest utilities, which supply both electricity and gas to customers, sell most of their output years in advance to protect themselves from market swings.

That means that only a longer-term increase in costs will feed through to Britain’s 27.1 million households, who have shouldered a big increase in electricity prices in the past year.

“The majority will be insulated against it,” John Musk, a utilities analyst at RBC Europe Ltd., said by phone.

Electricity recorded in the U.K. consumer price index surged 11.4 percent in November from a year ago. The measure is used by policymakers to help gauge inflation. Natural gas prices were little changed while gasoline and diesel costs were up more than 2 percent over the same period. Pump prices are about 4 percent higher than the same time last year, according to motoring group Automobile Association Developments Ltd.

U.K. month-ahead gas prices have already retreated to where they were at the end of last week but remain near the highest for this time of year since 2013, according to ICE Futures data.

Smaller Suppliers

Price spikes are more dangerous for smaller suppliers that don’t have large-scale hedging capabilities, according to Deepa Venkateswaran, analyst at Sanford C Bernstein Ltd. Last year, GB Energy, which had less than 200,000 customers, flunked out of the market as price jumps exposed the company’s inability to hedge.

The U.K. gas market is even more vulnerable to price spikes this winter after losing Rough, Centrica Plc’s giant storage site, which held more than 70 percent of the nation’s winter reserves.

It “will be interesting to see if any of the smaller suppliers get caught out by the sudden spikes and poor risk management,” Venkateswaran said.

For utilities like Centrica, SSE Plc and Drax Plc, which all have their own power plants, higher prices are instead an opportunity to market at a higher price the portion of their output that’s not already sold in advance. 

Consumer Bills

Centrica, the biggest supplier of energy to homes, declined to comment on the possibility of any increases in its bills. In a separate statement unrelated to the outages in the U.K., the German utility Innogy SE, which trades as nPower in the U.K., said increased competition for customers in Britain will weigh on its profits this year and next.

But while companies may struggle to justify raising tariffs based on a short-term price move, consistently high wholesale rates for the rest of the winter could “quite soon” mean increases for households, said Elchin Mammadov, an analyst at Bloomberg Intelligence in London.

A bigger concern for the U.K. economy as a whole is whether the exit from the European Union will make it even more vulnerable to price hikes in the future. As a net importer, Britain relies on pipeline connections with Norway and mainland Europe to meet 56 percent of gas supply. About 4 gigawatts of power cables provide as much as 8 percent of electricity, according to National Grid Plc data.

Brexit negotiations will make interconnections with the EU more problematic, according to Thierry Bros, a senior analyst at the Oxford Institute of Energy Studies.

Higher gas prices also will make the U.K. more able to attract liquefied natural gas cargoes away from other energy-hungry nations, he said. The nation has previously mainly lost out in the global market for cargoes, with sellers instead shipping tankers to higher-priced markets in Northeast Asia.

“LNG will look as the best option post-Brexit as it provides optionality,” he said.

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