Businesses and consumers likely to be hit this winter as therm costs rise?

Industry comment

Published: 26 April

Author: Alan O’ Brien

Type: Industry comment

Year: 2011

Perfect Storm of factors conspire to push up gas prices - businesses and consumers likely to be hit this winter as therm costs rise?

  • Climate change policy will ramp up prices
  • Global market demand for LNG will also drive costs upwards
  • Japan/North African/Middle Eastern crises likely to have knock on effect
  • Recovering UK economy also likely to trigger therm price hikes

LONDON - Sabien Technology Group plc (AIM: SNT), the manufacturer and supplier of M2G, an energy efficiency technology, today warns that UK businesses and consumers could be faced with increases in gas prices this coming winter.

Price rises per therm will be partly dictated by the increasing costs added to energy bills to pay for the UK’s climate change policy, says the company.

“Government figures suggest its climate policies will add 26% to the energy bills of medium sized firms by 2020,” said CEO Alan O’ Brien. “Consumers are also likely to be hit, but households will typically face rises of around 15-25% as a direct result of climate change policy – other factors however will push costs up, Gas bills across the UK have increased by 91% since 2003,” he said. *

“At the core of rising prices is the fact that wholesale gas is now a global market, especially with the emergence of liquefied natural gas (LNG).

“As with all global markets – the prices will be driven by the highest payer and demand,” he added.

Analysts and commentators point to the decrease in gas supply from the UKCS (UK Continental Shelf), which requires the UK to import from continental Europe or import LNG.

“But with emerging superpowers India and especially China consuming more and more gas, we are in effect competing with Asia for LNG cargos,” said O’Brien.

Other core factors which could precipitate price rises include:

  • Gas is a relatively low carbon fuel, therefore it is more attractive than oil and coal, again a higher premium can be demanded
  • Nuclear is losing its appeal across the globe following the Fukushima disaster, resulting in more demand for gas/LNG
  • The UK government may build CCGT power stations (combined cycle gas powered stations) - which will increase the demand for gas and therefore could increase the wholesale gas price
  • As the economy recovers and manufacturing output increases, demand will increase and ultimately prices

“Over in Europe, some of the buyers of electricity and gas will be impacted by the increase of oil prices due to the fact that the European gas purchase contracts are to a certain degree indexed to the price of oil,” said O’Brien.

So, what does this mean for the UK market?

“Our mature market and non oil-indexed wholesale gas arena suggests the increasing oil price will not directly impact on UK gas prices.  

“However, there is a key caveat at work here - as the UK increases its imports the oil index continental prices will increase prices in the UK,” he said.

O’Brien also warned that if the political unrest in the Middle East continued, then UK consumers could feel the pinch this coming winter.

“At a macro level the amount of oil produced by Libya, Egypt etc is small - for example, the 750,000 barrels of oil produced per day from Egypt equates to just 2 hours of output in Saudi Arabia.

“However if the turmoil expands into other oil producing countries then the increases could continue,” he said.

“Also, the ramifications of the Japan disaster for UK consumers is likely to be their lack confidence in nuclear.

“The UK government has nuclear power at the centre of its low carbon strategy. But since the Fukushima disaster countries including China, Germany, Switzerland, Austria and India have put on hold new nuclear power station approvals or are reviewing their current power stations,” he added.

So, how can end users ultimately reduce their gas bills?

“The increase in wholesale gas prices and ultimately the price the end user pays on their bills can be reduced significantly by no or low cost initiatives,” said O’Brien.

For example behaviour changes are relatively low cost or no cost to implement and retrofit energy efficiency technology – such as that produced and installed by Sabien - can deliver cost savings, CO2 reductions with paybacks under 18 months – with no impact to the buildings operation,” he said.