uk energy prices

8/9/2019 UK Energy Prices

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Energy Prices

Standard Note: SN/SG/4153

Last updated: 11 October 2013

Author: Paul Bolton

Section Social & General Statistics

The price of domestic gas and electricity has generally increased over the past eight years

after around a decade of falling prices. The cost of heating oil has increased by a larger

amount. There have been some price cuts over the past few years, but these have been

smaller than the price rises. Last winter all of the big six energy suppliers increased gas and

electricity prices by between 6% and 11%. So far this autumn only SSE has announced a

price increase (8%) which will be implemented in mid-November. Domestic prices have

ratcheted up as higher operating, network and environmental costs and higher supplier

margins have magnified the impact of longer term increases in wholesale costs. In the

medium to long term the pressures on price all appear to be upwards and the only way for

most consumers to reduce the impact of increased unit costs, and even to reduce their bills,

is through energy efficiency improvements.

This note focuses on trends in the domestic market -the costs of gas, electricity and other

fuels used for heating and the impact on fuel poverty. Most data is in price indices the

statistical literacy guide on index numbers gives some advice on interpreting them. An

analysis of the impact of earlier price trends on levels on consumption can be found in

Energy price rises and their impact on demand . The note Fuel Poverty looks at trends,

patterns and projections of fuel poverty and the article Energy prices and fuel poverty gives a

brief snapshot of trends in prices, fuel poverty and prospects for the future. Help with Energy

Bills gives information on sources of financial and practical help for individuals. The recent

Energy and Climate Change Select Committee Report Energy Prices, Profits and Poverty

contains information that many readers of this note may find useful.

Ofgem’s detailed analysis of the retail energy sector can be found on their Retail Market

Review pages and regular updates of trends in the broad make-up of a bill in their weekly

Electricity and Gas Supply Market Indicators. A more detailed analysis is included in

Household bills explained . The Department for Energy and Climate Change (DECC)

produces an annual analysis of the impact of energy and climate change policies on average

bills. This looks at current bills and forecasts through to 2020 and beyond. DECC’s Quarterly

Energy Prices contains comprehensive national and international statistics. This note does

not look at road fuel prices. Trends in these are summarised in Road fuel prices: Social

Indicators page and crude oil price trends are described in Oil prices.

This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to

address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or

policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as

a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required.

This information is provided subject to our general terms and conditions which are available online or may be provided on

request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with

the general public.

http://www.parliament.uk/briefing-papers/SN04442http://www.parliament.uk/briefing-papers/SN04442http://www.parliament.uk/briefing-papers/SN04850http://www.parliament.uk/briefing-papers/SN04850http://www.parliament.uk/briefing-papers/SN05115http://www.parliament.uk/briefing-papers/SN05115http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/green-growth/energy-price-rises/http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/green-growth/energy-price-rises/http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/green-growth/energy-price-rises/http://www.parliament.uk/briefing-papers/SN06163http://www.parliament.uk/briefing-papers/SN06163http://www.parliament.uk/briefing-papers/SN06163http://www.parliament.uk/briefing-papers/SN06163http://www.publications.parliament.uk/pa/cm201314/cmselect/cmenergy/108/10802.htmhttp://www.publications.parliament.uk/pa/cm201314/cmselect/cmenergy/108/10802.htmhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/Pages/rmr.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/Pages/rmr.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/Pages/rmr.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttps://www.ofgem.gov.uk/information-consumers/domestic-consumers/understanding-energy-billshttps://www.ofgem.gov.uk/information-consumers/domestic-consumers/understanding-energy-billshttp://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/3593-estimated-impacts-of-our-policies-on-energy-prices.pdfhttp://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/3593-estimated-impacts-of-our-policies-on-energy-prices.pdfhttp://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/3593-estimated-impacts-of-our-policies-on-energy-prices.pdfhttps://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttps://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttps://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttps://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttp://www.parliament.uk/briefing-papers/SN02638http://www.parliament.uk/briefing-papers/SN02638http://www.parliament.uk/briefing-papers/SN02638http://www.parliament.uk/briefing-papers/SN02106http://www.parliament.uk/briefing-papers/SN02106http://www.parliament.uk/briefing-papers/SN02106http://www.parliament.uk/site_information/parliamentary_copyright.cfmhttp://www.parliament.uk/site_information/parliamentary_copyright.cfmhttp://www.parliament.uk/site_information/parliamentary_copyright.cfmhttp://www.parliament.uk/site_information/parliamentary_copyright.cfmhttp://www.parliament.uk/briefing-papers/SN02106http://www.parliament.uk/briefing-papers/SN02638http://www.parliament.uk/briefing-papers/SN02638https://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttps://www.gov.uk/government/organisations/department-of-energy-climate-change/about/statistics#energy-price-statisticshttp://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/3593-estimated-impacts-of-our-policies-on-energy-prices.pdfhttps://www.ofgem.gov.uk/information-consumers/domestic-consumers/understanding-energy-billshttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/Pages/rmr.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/Pages/rmr.aspxhttp://www.publications.parliament.uk/pa/cm201314/cmselect/cmenergy/108/10802.htmhttp://www.parliament.uk/briefing-papers/SN06163http://www.parliament.uk/briefing-papers/SN06163http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/green-growth/energy-price-rises/http://www.parliament.uk/briefing-papers/SN05115http://www.parliament.uk/briefing-papers/SN04850http://www.parliament.uk/briefing-papers/SN04442


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1970 1975 1980 1985 1990 1995 2000 2005 2010

Index of real domestic fuel and light prices (Q1 1987=100)

Source: Quarterly fuel prices, DECC. Table 2.1.1

Contents

1 Domestic sector 3

Summary of energy use 3

1.1

Price changes 3

1.2 Domestic expenditure on energy 5

Average gas and electricity bills for typical consumers 5

Other estimates of average bills 6

Actual household expenditure 7

International comparisons 8

1.3 Impact on fuel poverty 9

2

Why have gas and electricity prices increase so much? 9

2.1 Spot wholesale gas prices 10

2.2 Overall assessments and projections to 2020 11

3 Reference tables 14


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1 Domestic sector

Summary of energy use

In 2012 the domestic sector was responsible for 29% of final energy consumption in the UK.

Gas made up 68% of total domestic energy use, followed by electricity (23%), petroleum

products (6%) and coal/solid fuel 2%. Total energy use by this sector fell by almost 20% in

2011, in large part due to the milder winter, before increasing by 11% in 2012. Domestic

energy use increased by 16% between 1970 and 2012 and 6% was has increased by 6%

since 1990.1

An estimated 97% of households in Great Britain had central heating in 2011. Among those

homes with central heating 85% used gas, 8% electricity, 4% oil and 1% solid fuel. Overall

53% of the energy used in homes in 2012 was for space heating, 30% for lighting and

appliances, 14% for water heating, and 3% for cooking.2

1.1 Price changes

The first chart opposite gives

monthly index values for

selected fuel components of the

Retail Prices Index (RPI) since

1987. This shows how the real

price of each has change over

this time and helps compare

trends. The second chart below

separates out each series to

better identify the trends for

individual fuel types. This datais summarised in Table 1 at the

end of this note.

1 Digest of UK energy statistics 2013, DECC. Table 1.1.5

2 Energy Consumption in the UK 2013, DECC

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150

170

190

210

230

1987 1990 1993 1996 1999 2002 2005 2008 2011

Index prices of selected fuel components of the RPI

indices relative to the all items RPI, January 1987=100Coal and smokeless f uels

Gas

Electricity

Heating oils

Source: ONS series DOBW, DOBY, DOBX, DOBZ and CHAW


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Gas prices fell consistently during the late 1980s and

1990s, with the exception of 1995 when VAT was

introduced. By late 2000 prices were one-third below

their January 1987 level in real terms. The main

reasons for the price falls up to 2000 were price

controls set by the regulator and, latterly, the impact of

competition. The price rose relatively slowly over thefollowing few years and more rapidly from autumn 2005

to the end of 2006. Prices peaked in January 2007 at a

level 82% above the late 2000 low and above the

January 1987 (immediately post-privatisation) level.

Prices increased again in early 2008 and in summer

2008. There were price cuts in early 2009 and early

2010, but price rises in autumn 2011 and winter

2012/13 meant that spring 2013 prices exceeded the

winter 2008/09 peak levels. The RPI figures do not yet

reflect the price rises implemented this autumn.

Electricity prices changed little until the mid 1990s after

which they started a period of consistent falls.

Continued price reductions over the following eight

years saw a real reduction in the price of around 30%.

Regulator-imposed controls on prices and, since 1999,

supply competition were again partly responsible for the

price reductions, as were the reductions in the Fossil Fuel Levy from 1996 onwards.

Electricity prices have increased since spring 2003 and, as with gas, price increases have

been greater since autumn 2005. The January 2007 price peak was 44% above the 2003 low

and 5% above the level immediately after privatisation (January 1991). As with gas, prices

increased in early 2008 and summer 2008 and fell back slightly in early 2009. However,unlike gas there have been no major cuts in prices since then. The autumn 2011 electricity

price rises were smaller than those seen for gas, the winter 2012/13 price rises were slightly

lower than those for gas. These took cash prices beyond their winter 2008/09 peaks, but real

electricity price levels are still slightly below this level.

If prices rise in autumn and fall in spring by the same amount the total amount paid by

consumers across the whole year will be higher than if they had remained the same

throughout the year because more energy is used in the colder months. Gas (and to a lesser

extent electricity) prices have followed this pattern in some recent years

The price of heating oil tends to mirror trends in crude oil and hence it has been extremelyvolatile over this period with numerous sharp spikes and a rapid rise from mid-2007 to mid-

2008 and a rapid fall afterwards. Prices have increased since early 2009 and the latest real

price was 91% above the January 1987 level and 235% above the late 1998/early 1999 low.

The cold spell in November/December 2010 resulted in a steep price spike for heating oil as

demand increased and in some places supplies were short due to the harsh weather

conditions. Sustained higher crude oil prices in 2011, 2012, in part linked to the political

unrest in the Middle East and tension between Iran and the West, have meant heating oil

prices have remained high in subsequent years.

Coal prices have shown a greater seasonal trend than the other fuels. The underlying trend

was downwards or static during the late 1980s and 1990s. There has been a generalupwards trend since then. The large rise in prices in late 2008 has not been reversed, but

subsequent winter peak prices have been somewhat lower in real terms.

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7080

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1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Coal and smokeless fuel

Electricity

Gas

Heating oils


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The next chart looks at annual

data from 1970 to 2012. Index

values are again expressed

relative to the RPI to show how

the price of these fuels has

changed relative to the general

price level. The annual indexvalues given here smooth out

season factors and large

monthly changes that were

shown in the earlier charts.

The longer term chart shows

that most energy prices

increased during the 1970s and

early 1980s. Heating oil

increased by the greatest proportion and all these fuels saw a sharp increase during the oil

shocks of the late 1970s. Gas was the exception to this general trend as its price generallyfell during the 1970s. The price of all of these fuels peaked in the early 1980s as the Miners’

Strike meant rising coal prices and increased demand for the other fuels. Average oil prices

peaked in 2011 in real terms, but 2009 prices electricity were the highest for the whole of this

period, 2009 peaks for gas and coal were exceeded in 2012.

1.2 Domestic expenditure on energy

Average gas and electr ic i ty bi l ls for typical con sumers

The RPI data in the previous section has the advantages of a long time series, monthly data

and being up-to-date. However, it does not give actual costs. The most meaningful indicator

in this respect is the average bill for a ‘typical’ consumer. DECC and its predecessor

departments have published this series back to 1990.

The cost of gas and electricity can vary according to supplier and type of payment. According

to DECC the average gas bill for 2011 varied from £773 for direct debit customers to £839 for

those paying quarterly bills. Table 2 at the end of this note includes these figures going back

to 1990; trends are illustrated in the chart below. More recent data also reflects savings

made from switching from the former monopoly supplier.

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1970 1975 1980 1985 1990 1995 2000 2005 2010

Index prices of selected fuel components of the RPIannual indices relative to the all items RPI, 1987=100

Coal and smokeless fuel

Gas

Electricity

Heating oils

Source: Quarterly fuel prices, DECC. Table 2.1.1


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The average standard credit bill

fell by a total of £93 (in 2012

prices) between 1991 and 2001

(20%), but has subsequently

increased by £459. Most of this

increase happened between

2005 and 2009. The average2012 standard credit bill in

Scotland was 1% below the

average for England and

Wales. These calculations use

a constant level of consumption

and hence only reflect

differences in the price paid per

unit in different areas.3

Table 3 includes equivalent information for electricity bills. Trends in average bills are also

included in the earlier chart. The average electricity bill for 2012 was £460-£501, dependingon payment method. Average bills have followed a similar trend to the RPI data with

consistent real falls in average standard credit bills totalling £120 in 2010 prices (28%)

between 1992 and 2003 and a £189 increase since 2004. The 2012 level was the highest in

this series, but the recent price rises have been noticeably smaller than for gas. Average

standard credit electricity bills in Northern Ireland jumped by much more than in the rest of

the UK in 2008 and 2009 and by a greater amount in 2012. This meant they were £50-70 per

year above the levels in England and Wales and Scotland.4

The 2012 bills are based on prices for the whole year, not at any one point during the year.

The 2012 figures will therefore only take partial account of the price rises announced late on

in the year.

Other est imates of average bi l ls

Earlier data from British Gas shows that since 1979 the peak gas bill (for the same

consumption level) was in 1983/84 at just under £700 in current prices.5 6 Data on electricity

bills since 1983 shows the peak real bill was also in 1983/84 at around £560 in current

prices.7 8 Neither of these series is entirely consistent with the data in Tables 2 and 3 –due to

differences in data sources, timing and geographies- but they do give an indication of earlier

trends and a guide to comparative bill levels. They suggest that electricity bills in 2012 were

below their peak mid-1980s peak. Gas bills in 2012 were at clearly their highest level from

this period.

The average bills mentioned above are different from some quoted elsewhere. Consumer

Focus usually estimates average bills using current prices, ie. what bills would be over the

next year if prices remained as they are. This is essentially a forward looking method and in

a time of rising prices will give higher figures than annual averages and vice versa. The

DECC data for 2007 to 2012 uses prices covering the whole calendar year. Prior to 2007

official figures used prices for the year to September. They are both essentially backward

looking, so gives a lower figure when prices are rising. In addition the average bill data

3 Quarterly energy prices, DECC. Table 2.3.2

4 ibid. Table 2.2.2

5 British Gas Financial & Operating Statistics 1987, 19946 Prices adjusted the all items RPI

7 Prices based on simple average of regional electricity company tariffs

8 Electricity Association: UK Electricity Tariff Rates

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1990 1993 1996 1999 2002 2005 2008 2011

Gas Electricity

Average annual standard credit bills for typical consumers£ 2012 prices


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produced by DECC uses ‘typical’ domestic consumption levels of 3,300 kWh and

18,000 kWh for gas and electricity respectively. These levels had been commonly used in

the industry, although some organisations, including Ofgem have recently revised down their

gas consumption levels.

While the level of ‘typical’ consumption used has no effect on trends in average bills, it does

affect the absolute value and hence the impact in pounds and pence of any given percentagechange. In 2012 the average domestic consumption of electricity and gas was 4,200 kWh

and 15,300 kWh respectively.9 The gas figure especially has fallen over time. Ordinarily this

is connected to a mild winter, but high prices and improvements in energy efficiency will also

have been a factor over recent years. Gas consumption had been 20,000-20,500 kWh per

household over the period 2001-04. Actual 2012 consumption levels would cut around £125

a year off the figure for a ‘typical’ gas consumer and add around £140 a year to the figure for

the ‘typical’ electricity consumer.10 Mean consumption levels can be skewed by a relatively

small number of very high users. It is likely that households with electric central heating skew

the mean electricity figure above the median value and the ‘typical’ consumption level is

closer to consumption levels for households with other forms of heating.

Heating oil and coal pricesThe average price for deliveries of up to 1,000 litres of heating oil in August 2012 was

55.3 pence per litre. The trend in prices is illustrated in the earlier charts. The price peaked at

64.4 pence per litre in April 2012 which was just above the earlier peak of 64 pence in July

2008, it was below 20 pence per litre in the first months of 2004 and 10 pence a litre in early

1999.11 The average price of 50kg of smokeless fuel in September 2012 was £20.04. This

was up from £10.90 January 2004; a real increase of 37%.12

Actu al hou sehold expenditure

According the Expenditure and Food Survey mean household expenditure on all (non-motor)

fuels in 2010 was £23.46 a week or around £1,220 a year. Expenditure on motor fuel alonewas almost £16 a week more than this.13 Average spending on non-motor fuels for

households in the lowest income decile was £13.90 a week (8.0% of total spending)

compared to £31.70 in the top decile (3.0% of all spending).14

The 2009 average weekly spend on non-motor fuels was the highest in real terms since the

late 1980s, but still relatively low when considering the period from the mid-1970s. The real

level of spending per household increased during the late 1970s and early 1980s to a peak

of £29 a week or £1,500 a year (2011 prices) in 1985. Average spending fell in most of the

next 15 years and was below £20 from 1997 to 2006. These trends will be affected by

consumption levels and household size as well as unit prices. The same survey found that

average spending on electricity for households with electric central heating was £15.30 aweek in 2011 or £800 a year. Average spending on gas for households with gas central

heating was £12.46 a week or £650 a year. 15

9 Energy consumption in the UK 2013, DECC

10 Based on average cost per kWh from Tables 2 and 3

11 Quarterly energy prices, DECC. Tables 4.1.1 and 4.1.2

12 ONS series CZMN and CHAW13

Quarterly energy prices, DECC. Table 2.6.214

Family spending 2012, ONS. Table A615

Quarterly energy prices, DECC. Table 2.6.2


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In 2012 UK households spent a

total of £15.3 billion on

electricity, £15.2 billion on gas,

£1.7 billion on liquid fuels (fuel

oil and heating oil) and

£300 million on solid fuels.

Total expenditure on thesefuels was £32.4 billion up from

below £15 billion in 2003. The

chart opposite illustrates total

spending on these fuels as a

proportion of total consumer

expenditure. Spending on fuels

broadly kept pace with total

consumer spending over the

first 20 years shown here.

Since the mid 1980s total consumer spending has increased at a faster rate. The proportion

spent on fuels fell from its 1982 peak of 5.4% to 2.1% in 2003. It increased in eachsubsequent up to 3.3% in 209 the highest share since 1995.16

Internat ional com parisons

In the first half of 2013 domestic

prices for gas were lower in the

UK than in the majority of other

EU member states. The UK has

long had among the cheapest

domestic gas in the EU. The

chart opposite shows average

unit prices for a ‘medium’

domestic consumer of gas

(5,600-56,000 kWh a year),

including taxes, for EU states.

The UK figure of 4.5 pence/

kWh was 19% below the EU

median. Prices in the UK have

become relatively cheaper due

to the strength of the Euro since

early 2008. Even its more

recent weakness againstSterling has not reversed much

of the earlier gain. All the

countries with lower prices were

new (post 2004) member states.

Sweden had the highest price at

10.4 pence/kWh.

The next chart gives data on the

average cost of electricity for a

medium user (2,500 to

5,000 kWh a year), including

16 Consumer Trends quarter 2 2013, ONS. Uses revised data from 1997 onwards only.

0%

1%

2%

3%

4%

5%

6%

1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

% of consumer expenditure on electricty, gas and otherfuels

Source: Consumer Trends, ONS

0

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8

10

SE DK IT PT NL GR ES AT FR SK DE BE IE CZ HU LT LU UK EE BG LV SI PL CR RO

Domestic price of gas, medium user, January - June 2013pence/kWh

Source:Quarterly energy statistics, DECC

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10

15

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25

DK DE CY IT IE ES BE SE AT PT NL LU UK MT SI SK HU FI CZ PL GR FR LV CR LT EE RO

Domestic price of electricity, medium user, January - June 2013pence/kWh

Source: Quarterly energy statistics, DECC


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taxes, for all EU28 states. The price in the UK was just ranked in the top half and was 2%

below the EU median.

VaasaEtt, an energy think tank, publishes monthly domestic gas and electricity prices for

major cities in EU countries. Their latest Household Energy Price Index (September 2013)

broadly confirms the relative picture shown above. Based on simple exchange rates London

had the twelfth most expensive electricity (out of 23) and the seventh cheapest gas (out of22). London prices become relatively cheaper if real exchange rates are used17 as these

make prices in Central and Eastern Europe relatively more expensive and London moves to

seventh cheapest for electricity and second cheapest for gas.The report also breaks down

these prices by their constituent parts. Cities with the highest prices tended to have

particularly large percentage contributions from energy taxes and VAT.

1.3 Impact on fuel poverty

A household is said to be in fuel poverty if it needs to spend more than 10% of its income on

fuel to maintain a satisfactory heating regime. Between 1996 and 2003 and 2004 the number

of UK households in fuel poverty fell from around 6.5 million to around 2 million. The number

of vulnerable households (those in receipt of means tested or disability related benefit) in fuelpoverty fell from around 5 million to around 1.5 million over the same period. Energy price

rises since then have seen the total number of households in fuel poverty increase to an

estimated 5.6 million in 209 before falling to 4.5 million in 2011 (3.5 million vulnerable).

Subsequent price rises are expected to increase fuel poverty further.18 A more detailed

analysis of fuel poverty trends and patterns can be found in the Fuel Poverty Statistics note.

2 Why have gas and electricity prices increase so much?

There have been three ‘waves’ of increased prices for domestic gas and electricity prices

since the late 1980s; 2005/2006, 2008 and 2011/12. The earlier analysis has shown that

trends in gas and electricity prices have been similar, but there has been some difference inthe size of and timing of price spikes. Gas has generally been the single most important fuel

used to generate power,19 so we would expect some connection between prices. Generators

can switch to other fuels (mainly coal) to a limited extent, but this additional demand

increases the price of these fuels.

Broadly speaking there are five elements that make up a customer’s energy bill; the

wholesale cost of fuel, the costs of supply –transmission, distribution and metering, costs of

Government/EU policy, VAT and supplier margins. Ofgem estimates that wholesale fuel

costs are the largest single element; 44% of typical dual fuel bills in October 2013.20 The

costs of supply are thought to be next most important; around 25% of a typical electricity and

22% of a typical gas bill in December 2012.21

Costs of policy are higher for electricity thangas, 11% compared to 6% according to Ofgem, but estimates vary depending on which

policies are included. VAT has remained at 5% since 1997. Ofgem’s October 2013 estimate

of supplier margins for a dual fuel customer was 5% of their bill and company operating costs

around 10%.22

17 Purchasing Power Standards

18 Annual report on fuel poverty statistics 2013, DECC

19 Recent higher gas prices have meant that more coal is used to generate power in the UK than gas, but

variations in gas prices still provide a good guide to changes in costs of marginal generation20

Electricity and Gas Supply Market Indicators, Ofgem (October 2013)21

Household Energy Bills Explained , Ofgem (February 2013)22

Electricity and Gas Supply Market Indicators, October 2013 (and earlier)

http://www.energypriceindex.com/?page_id=6http://www.energypriceindex.com/?page_id=6http://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snsg-05115.pdfhttp://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snsg-05115.pdfhttp://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snsg-05115.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttps://www.ofgem.gov.uk/ofgem-publications/64006/householdenergybillsexplainedudjuly2013web.pdfhttps://www.ofgem.gov.uk/ofgem-publications/64006/householdenergybillsexplainedudjuly2013web.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttps://www.ofgem.gov.uk/ofgem-publications/64006/householdenergybillsexplainedudjuly2013web.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.parliament.uk/briefingpapers/commons/lib/research/briefings/snsg-05115.pdfhttp://www.energypriceindex.com/?page_id=6


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2.1 Spot wholesale gas prices

The chart opposite illustrates

trends in wholesale gas prices

in the UK to October 2013. This

clearly shows the very sharp

peaks in late 2005 and early

2006 and the generally higherprices during this period. There

have been large relative price

changes since then, but not on

the same scale. There is some

evidence of lower levels of price

volatility in 2007 and, apart from

early 2013, most of the period

since 2009. The chart also

shows a steady increase in the

wholesale price of gas from spring 2007.

The peak in the wholesale price of gas and electricity in late summer 2005 fed through

quickly to higher industrial prices and more slowly to higher domestic prices. Falling

wholesale prices in the second half of 2006 meant lower industrial prices, domestic prices

started to fall in early 2007.

The 2005/06 price spikeThere were specific aggravating factors behind this spike; the lack of UK import and storagecapacity and insufficient imports through the gas interconnector with France. A written answerstated that there was 'general concern' that other governments' rules were diverting supplies ofliquefied natural gas away from Great Britain and that supplies through the interconnector werenot fully responding to recent strong price signals.

23 Higher UK wholesale prices in winter

2005/06 should have resulted in greater quantities of gas flowing from continental Europe tothe UK than were actually seen. The preliminary findings of a European Commission inquiryidentified a range of market distortions that have the effect of driving up prices and reducingchoice. These were said to largely result from former monopoly suppliers on the continentremaining in dominant positions and effectively preventing new suppliers from entering themarket.

24 Increased LNG capacity and new pipelines to the Netherlands and Norway have

helped to diversity gas import sources and hence reduce the possibility of supply squeezes.

23 HC Deb 15 December 2005 c2254w24

Towards an Efficient and Integrated European Energy Market – First Findings and Next Steps, EuropeanCommission Conference, Energy Sector Inquiry – Public Presentation of the Preliminary Findings. 16February 2005

0

1

2

3

4

5

0

1

2

3

4

5

Oct 05 Apr 06 Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13

Wholesale price of gas in the UK, pence/kWhDaily system average price

Thirt y day average

Source: www.nationalgrid.com


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11

The more recent price rises

are less clear from the earlier

chart as it is dominated by

the price spikes in 2005/06.

They are clear in the chart

opposite which starts in

spring 2006. Pricesincreased from 0.5-1.0 pence

per kWh in early 2007 to

more than 2.0 pence per

kWh in spring and summer

2008. Increased wholesale

prices led to a round of price

rises in early 2008.

Continued high forward

prices were said to be behind

further price rises announced in summer 2008.

There was a large amount of volatility after the summer 2008 peak in oil prices, but these

daily wholesale prices did not start to fall until February 2009. They reached their recent low

of around 0.5 pence per kWh in early autumn 2009. The first domestic price cuts following

these price falls did not happen until February 2010. They averaged 6%, a similar price cut to

that seen a year earlier.25 Wholesale prices increased steadily back up to around the

2.0 pence per kWh level from early 2011 onwards. The 30-day average neared 3.0 pence

per kWh in early 2013, but soon returned to close to its earlier levels.

These figures are spot prices and suppliers frequently quote forward gas prices, especially

those for the coming winter. Forward contracts can cover the period of a few months or years

ahead and suppliers will have a variety of buying strategies to hedge against the volatility inshort term prices and ideally to cut their costs.

2.2 Overall assessments and projections to 2020

Ofgem carried out detailed analysis of gas and electricity markets and specifically looked at

how prices charged to consumers reflected changes in wholesale forward prices. This

analysis can be found in the report of their Energy Supply Probe. The actual information from

suppliers on hedging strategies was not published, but concentrated much of their analysis

on an 18-month hedge strategy. Statistical analysis of this strategy showed a very close

match with retail prices. The broad trends in wholesale costs they estimate are similar to the

spot prices given above, but they are much less volatile. The report concluded that there was

no evidence that price rises were passes on more quickly than price cuts and no evidence

that the big six suppliers were acting as a cartel.

After this publication Ofgem started to publish quarterly wholesale/retail price reports which

look at changes in the two and alongside their other costs, estimate supplier margins. Ofgem

has now started publishing headline indicators of average bills and estimated costs every

week. These can be found on their Electricity and Gas Supply Market Indicators pages.

One important point to note is that while the main factor in consumer bills is the wholesale

cost of fuel, bills are ‘ratcheting up’. Over time a given wholesale price implies a higher retail

price. This is not just connected with profit levels, although Ofgem’s evidence suggests that

these have increased recently, it is with other costs to suppliers listed earlier. Ofgem

25 ONS series DOBY

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

May 06 Nov 06 May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 Nov 11 May 12 Nov 12 May 13

Wholesale price of gas in the UK, pence/kWh

Daily system average price

Thirty day average

Source: www.nationalgrid.com

http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20-%20Initial%20Findings%20Report.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20-%20Initial%20Findings%20Report.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20-%20Initial%20Findings%20Report.pdfhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Pages/Energysupplyprobe.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Pages/Energysupplyprobe.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Pages/Energysupplyprobe.aspxhttp://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Documents1/Energy%20Supply%20Probe%20-%20Initial%20Findings%20Report.pdf


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estimates that overall these costs increased by around £150 for a typical dual fuel customer

in the four years to November 2012; a 40% increase.26

The Committee on Climate Change looked at overall price increases between February 2004

and January 2011 and broke the contributory factors down into more detailed categories.

Estimated contributory factors to domestic energy price rises Feb 2004 to Jan 2011

Gas Electricity

Overall price increase 121% 79%

% of increase in unit costs due to:

Wholesale energy 66% 54%

Tranmission, distribution and metering 20% 13%

Carbon price - 9%

Renewables - 6%

Energy efficiency f unding 7% 13%

VAT 5% 5%

Es timated increase in annual bill (2004 to 2010) £295 £160

Source: Hous ehold energy bills – impacts of meeting carbon budgets Co mmittee on Climate Change, December 2011

This also shows that wholesale costs were the main driver of price rises; however the range

of policy-related costs pressures is estimated to have been responsible for 7% of the gas

price rise and 28% of the electricity price rise during this period. Energy efficiency funding will

have helped to cut consumption during this period to some extent and this is not factored in

here as the percentage shares are for unit costs only. The impact of energy efficiency

improvements will also be felt into the future through lower consumption. These estimates

give a higher policy-related share than Ofgem figures which include the carbon price(through the EU ETS) in wholesale costs.

DECC has estimated that current energy and climate change policies added around £33

(5%) to a typical domestic gas bill in 2013 and £80 (14%) to an electricity bill. Their analysis

across the full range of current and previous policies suggests that they have not changed

gas bills but cut electricity bills by around 3% compared to what they would have been with

no policies. This analysis includes the energy efficiency savings from earlier energy bill-

funded schemes, the impact of policy on wholesale prices, boiler regulations and EU

minimum standards of electrical efficiency. Real increases in typical bills to 2020 are forecast

to be 6% for both fuels. In 2020 the full range of policies are projected to cut typical gas bills

by 1% and electricity bills by 11%.27

The Committee on Climate Change separates out its projections of increases in unit costs

from the potential savings on energy consumption that households could make up to 2020.

Both elements are needed to calculate an average bill. Their combined estimate is that with

current policies average dual fuel bills will increase by around 18% in real terms between

2010 and 2020 and that 60% of the increase will be policy related. With additional feasible

energy efficiency policies the 2020 bill could be cut to a level where it was only 2% above the

real 2010 level.28

26 ibid.

27 Estimated impacts of energy and climate change policies on energy prices and bills , DECC (March 2013)

28 Household energy bills – impacts of meeting carbon budgets, Committee on Climate Change, December 2011

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_Report_Final.pdfhttp://www.theccc.org.uk/reports/household-energy-billshttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_Report_Final.pdfhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_Report_Final.pdfhttp://www.theccc.org.uk/reports/household-energy-billshttp://www.theccc.org.uk/reports/household-energy-billshttp://www.theccc.org.uk/reports/household-energy-billshttp://www.theccc.org.uk/reports/household-energy-billshttp://www.theccc.org.uk/reports/household-energy-billshttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172923/130326_-_Price_and_Bill_Impacts_Report_Final.pdf


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There are a number of reasons for longer term increase in wholesale prices. According to

Ofgem the two main causes of the increased price of domestic gas are high oil prices and

declining UK gas supplies.29 The gas interconnector with Europe means that the UK is part of

the European gas market. Continental gas prices are contractually linked to oil prices so the

sharp increase in oil prices have fed through to wholesale gas prices in Europe and the UK.

The UK became a net importer of gas in 2004 for the first time in recent history. This means

suppliers generally have to pay more for such gas. According to the (then) DTI the UK’sincreasing import dependence is likely to result in higher gas prices in the medium term. 30

More recent increases in the price of coal and the higher price of allowances on the EU

Emissions Trading Scheme will also increase electricity prices.

29 Household energy bills explained , Ofgem (September 2005)

30 Energy Trends September 2005 , DTI.


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3 Reference tables

Table 1

Fuel price components of the RPI

Indices relative to the all-items RPI, January 1987=100

Coal and

smokeless

fuels Electricity Gas

Heating

oils

Fuel and

light

Jan 1987 100.0 100.0 100.0 100.0 100.0

Jan 1988 98.5 96.8 92.4 94.2 95.2

Jan 1989 92.9 97.8 91.2 80.5 93.9

Jan 1990 88.2 96.8 87.5 104.2 92.6

Jan 1991 86.4 96.9 88.6 114.3 93.4

Jan 1992 86.7 102.9 88.1 77.1 94.2

Jan 1993 86.0 103.5 82.2 82.7 92.2

Jan 1994 84.9 98.5 80.2 77.1 88.7

Jan 1995 87.9 101.4 84.1 76.6 91.8

Jan 1996 85.7 98.1 82.8 79.0 89.8Jan 1997 84.8 92.3 80.5 87.6 86.3

Jan 1998 81.6 83.8 74.8 69.6 78.7

Jan 1999 81.5 81.1 72.7 58.0 76.1

Jan 2000 81.3 79.0 70.7 86.0 75.3

Jan 2001 81.6 74.6 66.9 93.2 71.9

Jan 2002 85.6 74.1 72.2 79.6 73.7

Jan 2003 85.1 72.3 70.9 92.5 73.0

Jan 2004 84.8 72.1 71.6 89.8 73.2

Jan 2005 91.1 78.1 80.5 104.0 80.9

Jan 2006 95.7 84.1 90.1 135.3 89.6

Jan 2007 99.1 102.2 121.0 116.7 110.4

Jan 2008 103.6 93.7 100.9 159.9 100.0Jan 2009 136.1 122.1 152.5 145.3 134.9

Jan 2010 131.7 108.4 138.3 177.8 123.0

Jan 2011 127.5 104.8 130.2 205.1 119.9

Jan 2012 131.2 114.1 149.2 206.0 132.6

Jun 2013 124.0 114.3 151.2 187.9 132.5

Jul 2013 124.4 114.7 151.2 191.8 133.0

Aug 2013 123.6 114.1 150.4 191.0 132.3

Changes

Last 12 months -1.0% -100.0% -100.0% -3.6% +4.2%

Last two years +0.2% -100.0% -100.0% -0.5% +11.1%

Sources: ONS series CHAW, CHGB, DOBW, DOBY, DOBX, DOBZ


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Table 2

Average annual domestic gas bills for a typical consumer in Great Britain

£ 2012 prices

Standard credit Direct debit Prepayment

Homesuppliers

Non-homesuppliers All

Homesuppliers


Homesuppliers


1990 .. .. 470 .. .. .. .. .. 500

1991 .. .. 473 .. .. .. .. .. 498

1992 .. .. 465 .. .. .. .. .. 492

1993 .. .. 435 .. .. .. .. .. 461

1994 .. .. 443 .. .. .. .. .. 482

1995 .. .. 460 .. .. 437 .. .. 488

1996 450 418 450 420 393 420 478 478 478

1997 458 387 457 428 371 428 486 468 486

1998 438 360 431 384 341 379 453 446 453

1999 423 352 408 367 335 359 424 438 426

2000 410 345 392 361 328 351 410 429 413

2001 400 339 380 356 321 345 400 414 401

2002 413 346 393 374 327 356 414 414 414

2003 415 358 397 375 341 362 415 425 417

2004 417 374 403 384 359 374 430 414 425

2005 478 421 459 433 402 419 482 460 476

2006 589 493 548 523 462 490 595 539 575

2007 615 593 605 540 553 548 662 624 647

2008 684 683 684 630 636 634 731 689 712

2009 765 746 758 712 690 698 808 775 791

2010 715 697 707 684 652 663 713 705 709

2011 773 741 760 747 687 707 774 738 754

2012 865 804 839 835 743 773 862 802 828

Not es: British Gas is the home supplier, none home suppliers are all ot hers

Data before 2007 are for Quarter 4 from the previous year to quarter 3 of the named year. From 2007 data are for the calendar year

Data adjusted to 2010 prices using Octo ber 2011GDP deflato rs

Source: Quarterly energy prices, DECC, Table 2.2.1


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Table 3

Average annual domestic electricity bills for a typical consumer in the UK

£ 2012 prices

Standard credit Direct debit Prepayment

Home

suppliers

Non-home

suppliers All

Home

suppliers

Non-home

suppliers All

Home

suppliers

Non-home

suppliers All

1990 .. .. 404 .. .. .. .. .. 435

1991 .. .. 415 .. .. .. .. .. 447

1992 .. .. 430 .. .. .. .. .. 463

1993 .. .. 420 .. .. .. .. .. 451

1994 .. .. 416 .. .. 411 .. .. 445

1995 .. .. 421 .. .. 415 .. .. 449

1996 .. .. 405 .. .. 397 .. .. 433

1997 .. .. 397 .. .. 386 .. .. 421

1998 .. .. 367 .. .. 353 .. .. 390

1999 356 328 353 341 312 339 376 361 376

2000 345 320 341 331 307 325 365 363 364

2001 331 308 325 318 295 310 348 340 347

2002 324 295 315 313 283 300 342 324 336

2003 320 294 310 308 280 295 332 324 330

2004 321 295 311 311 280 295 341 320 332

2005 350 323 339 337 304 320 367 353 362

2006 396 383 391 378 349 362 410 421 415

2007 442 408 427 418 376 393 448 439 445

2008 495 453 476 472 415 438 503 489 497

2009 502 455 480 472 419 438 503 475 489

2010 473 431 452 442 398 413 475 451 463

2011 496 464 479 461 430 440 497 476 486

2012 516 487 500 479 451 460 518 489 501

No tes: Fo rmer public electricit y suppliers are home supplier within their own areas, none home suppliers are all ot hers

Data befo re 2007 are fo r Quarter 4 from t he previous year to quarter 3 of the named year. From 2007 data are for t he calendar year

Data adjusted to 2010 prices using October 2011GDP def lato rs

Source: Quarterly energy prices, DECC, Table 2.3.1