Wholesale Prices affect Business Gas

According to the energy regulator Ofgem, rising gas prices have been the main factor in the increasing cost of energy over the last eight years. Prices had fallen consistently from 1986 onwards. However, from 2004-05, this trend changed and prices began to rise, at the same time as the UK first began importing more gas than it produced at home. A consequence of becoming more dependent on foreign gas supplies has been that global events have become proportionally more influential in determining business gas prices.

With gas supplies to the UK coming via continental pipelines through Belgium and Norway, the prices paid on the wholesale market by energy providers must at least equal those on mainland Europe in order to ensure supply. At times of peak demand across Europe, such as during cold weather, the wholesale market price of domestic and business gas can increase dramatically. The recent severe weather across the continent caused a spike in demand, resulting in significant price increases. In the UK, the price of gas for next day delivery reached a peak of 75p per therm, which was the highest level for more than three years.

The situation is made more acute because Britain is heavily reliant on supply of gas from Gazprom. The company is the world’s largest extractor of natural gas and is also 50% owned by the Russian government. It is the source of approximately 20% of all European gas, the majority of which is currently transported by pipeline via Ukraine. In 2009, disagreements between the Ukraine and Russia led to a severe disruption in supply, which lasted several weeks, and the situation showed the consequences of a limited supply network. In response, the European Commission established the Gas Coordination Group, which was tasked with improving EU countries preparedness for disruption in domestic and business gas supply. One outcome has been for EU countries to maintain sufficient supplies to maintain domestic and business gas usage for a period of 30 days. This has helped to introduce some stability to supply.

There have also been announcements by Gazprom of organisational plans that should have the effect of diversifying its gas transportation network. In September Gazprom signed contracts with three Western European companies to build the South Stream gas pipeline into Eastern Europe. The three companies - French company EdF, Italian Eni and German energy company Wintershall - will take a combined interest of 50% in the pipeline, while Gazprom will control the remaining 50%. The project will be to transport natural gas from Russia to Europe under the Black Sea and will eventually supply ten countries in Europe once it has been completed, which is expected to be in 2015. Additionally, in November Russian Prime Minister Vladimir Putin announced that the company would be increasing its stake in Belarus pipeline firm, Beltranshaz from 50% to 100%.