Why aren’t gas bills falling more?

Now the cold weather is here, it's time to start turning up the central heating and our other seasonal pastime: grumbling about the cost of gas.

Domestic gas bills have fallen by just £59 a year for the average customer, whose typical bill is £700, in the last year. That is despite a near 40% plunge in the price of gas on the international market.

"Despite what the energy suppliers say we think there's still scope for retail prices to come down," said Robert Hammond of Consumer Focus, the independent consumer champion.

"The suppliers are getting away with making huge profits while over five million UK consumers remain in fuel poverty. Energy prices should be cut before temperatures drop and people struggle to heat their homes."

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Why prices should fall
A glut of new gas resources, including giant new gas fields in the Gulf and the US, and improved extraction techniques are driving the price falls. This is helping consumers in other countries save money, but not us.

A recent report by regulator Ofgem showed that the average UK gas customer on a dual fuel contract was providing £170 a year in gross profits to suppliers, compared to an average £110 over the last three years. Worse still, domestic gas companies like British Gas are likely to make a further £80 from each of us over the next 18 months if domestic prices aren't cut.

Ofgem unworried
Ofgem, which you might think is there to protect the consumer, isn't worried about this. "We've no reason to believe there is any anti-competitive behaviour in the market at the moment," a spokesman told MSN, adding: "The companies smooth the effects of wholesale prices [though their tariffs]".

With enemies like that, Britain's gas companies certainly don't need friends.

On the face of it they don't have much to excuse their behaviour. British gas companies don't have the problem of continental companies which are locked into 30 year "take or pay" contracts with Russia's export monopoly Gazprom.

These oil-price linked contracts, which firms like Germany's E.ON and France's Suez are trying to extricate themselves from, would certainly explain the high prices.

We're on the spot market
"Continental Europe is particularly locked in [to high prices], but the UK is spot market based," said Edward Cox, an editor at gas market analysis firm ICIS Heren.

These "spot" markets do reflect day-to-day changes in price. They are a bit like the standard variable rate for a mortgage, rather than the fixed rates that continental gas companies have.

But because of the insecurity of Britain's supply situation, gas firms here have to hedge their requirements by buying gas futures, a form of insurance against price rises. And as so often with insurance, the premiums are expensive.

Have to buy when you need it
Buying futures is necessary because Britain has little gas storage capacity, a fact that is very much to the fore now that liquefied natural gas (LNG) is available. We have enough space to store 15 days' supply, compared to the 99 days that France has available.

The less of our gas we supply ourselves, the more acute the problem becomes. "The North Sea only supplies half our gas, and this is likely to fall to just 20% by 2020," said Cox.

Storage problems
With North Sea supplies dwindling, the UK needs to have the gas delivered when it needs it, rather than buying when it's cheap and storing it until required. All too often the time when gas is needed is when the weather is cold, just when demand is at its height and prices high.

Britain is building more gas storage facilities, including the recently completed Dragon facility at Milford Haven, a site at the Isle of Grain in Essex, and salt caverns in East Yorkshire and Cheshire. But much more will be needed.

Cheaper gas for others
Things are looking better for many other gas-dependent countries.

There have been a spate of giant gas finds around the world in places like Qatar, Iran, Australia, Kazakhstan and just this week, Peru. Though most of them are far from consumer markets, breakthroughs in refrigeration, compression and storage have allowed them to be shipped safely around the world by tanker as LNG.

On top of this the US, which has always been the world's largest natural gas consumer, has made great progress in extracting gas cheaply from its own extensive shale deposits.

This could revolutionise supply to the market there, making the US self-sufficient for 100 years, according to a report released in 2008.

America, the Saudi Arabia of natural gas?
"Shale gas makes the US the Saudi Arabia of natural gas," said Aubrey McLendon, chief executive of Chesapeake Energy, a large US natural gas firm, speaking at the launch of the report.

The International Energy Agency is more cautious, but appears not to dispute the implications. "[There is] the prospect of a large glut in gas supplies persisting to at least the 2010s," the IEA said in a draft report leaked last week.

Lack of strategic vision
Britain seems to have been caught out by a lack of strategic vision. There's a glut, but we can't share in its benefits.

Successive governments have milked North Sea production for taxes and encouraged maximum output, which has drained gas fields and switched us back to become net importers again far sooner than we needed to be.

Norway, by contrast, nurtured its oil and gas fields, limited production in the 1980s and has saved what it earned. It now has a vast investment fund worth £240 billion for the benefit of its population, while we have more than £1 trillion in debts.

Squandered resource
By failing to set out a clear multi-decade vision for our North Sea bounty, we have failed to get the best from it. The result is high and volatile prices, lack of price visibility for big industrial users, and domestic consumers who get caught out left, right and centre.

In the long term, however, improved techniques may mean Britain too has the benefit of the same kind of gas bonanza as the US is currently enjoying. Many of the country's old coalmines are full of methane, which can perhaps be extracted.

However, for now we're stuck with high gas bills.

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