Wholesale gas prices have collapsed!!!

cepheus

Do the gas companies fix prices themselves, or hedge, so a drop in the wholesale price doesn't necessarily mean they will or even can pass it on?

Kimitatsu

I apologise if I havent understood the question properly but the way it works is that the oil companies who extract the natural gas have daily quotas they have to meet, these are priced on a per thermic ton basis, so utility companies will agree to buy so many thermic tonnes at a set rate for the duration of the contract. All of the other gas goes to the spot market and is paid for on a "on demand" basis.

The utility companies partly because of privatisation and switching can only make an educated guess at the usage they will need (hence utility co's encourage us to cap beacuse they have a history of usage and can buy long based on that usage). They set the price per therm based on what they have been able to haggle with the oil co's, a usage fee for the grid, operating costs and something for profit on top (remember the shareholder is king).

So, if they get it wrong, then either they have massive profits, and the government takes a windfall tax, the shareholders are happy but they are the pariahs of the UK, or if they have underpriced their market then they make a loss, there is no money to invest in the infrastructure and replacement of aging power stations and they lose their shareholders.

So in effect, yes they do fix their own prices and they do hedge but they are reliant on the spot market prices not being overly high in order to make a profit. When we have a cold winter which we did last year then the whole of Europe needed more gas, so its not just us in that market place it is the whole continent, which drove prices up. Those prices are in turn passed onto the consumer as they affect the companies profits.

kjsmith7

Kimitatsu - how do you know all of this? Do you/did you work for an energy company or as something to do with the energy market? Just curious, you seem knowledgeable!!

cepheus

I suppose what we all wan't to know is that if the wholesale price of gas and oil goes down like it just has, and continues to do, will this be reflected in our energy bills at some stage in the future, and if so are we talking months or years?

Could I assume the price we pay is like some sort of long term moving average of the wholesale price.

Plushchris

A_fiend_for_life wrote: »

Thats something that has stopped me capping. If prices go down cappers get stung, if they go up non-cappers get stung. If prices stay about the same on average for capped and non capped cash back switchers gain.

I think winter fuel allowance will have to be increased and broadened to prevent a strain on the NHS.

I think you are little confused, if prices go down cappers wont get stung, fixers will be though!

There is a difference between capped and fixed.

Kimitatsu

cepheus wrote: »

I suppose what we all wan't to know is that if the wholesale price of gas and oil goes down like it just has, and continues to do, will this be reflected in our energy bills at some stage in the future, and if so are we talking months or years?

Could I assume the price we pay is like some sort of long term moving average of the wholesale price.

In the long term, our prices are reflected in the state of the global energy market. It was only a few years ago that utility companies were dropping their prices (we seem to have quickly forgotten!) because they could afford to cover all of their costs and pass on a reduction to the consumer.

So yes the price we pay is reflective of the long term average of the wholesale price of oil and gas. In the short term, no I dont see energy prices going down, over the longer term, 5-10 years then they may level off and wages should catch up, so in real terms making our fuel bills cheaper

IMO and it is only my opinion, we are not going to see price reductions in the short term, because we do not have a realistic plan for our energy usage in this country. Ideally we should be looking towards renewable energy to provide the basis of our energy; nuclear is clean and efficient but is not easy to make short term increases in production, wind farms can only provide a certain amount of our energy, solar power is expensive to install and again can only provide a limited amount of energy. but these are not popular with people, and are slow to see a return on capital because of this. To deal with short term fluctuations in energy we can then be reliant on our fossil fuels in the form of solid fuels and gas, which would mean we could be reliant on our own fuel sources once again. If we were able to put this into our energy plans then we would see if not a drop then a levelling off of energy prices in the long term. Once again though this needs massive investment and long term plans put into place.

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A_fiend_for_life

Plushchris wrote: »

I think you are little confused, if prices go down cappers wont get stung, fixers will be though!

There is a difference between capped and fixed.

I might be wrong but capped prices are elevated and will go no higher than the rate they are currently paying. From what I could see capped prices were not going to be reduced if prices go down. So really capped and fixed are the same thing.

On another note, having read Kimitatsu's post, #21, however on exit fees I wonder if that will be increased as that would potentially keep folk on tight budgets locked in.

cepheus

Noticed as soon as the wholesale price dropped the British gas advert is now replacing previou cap with a fix (think this is about 35% increase price) until sept 2011!!!

Sam_84

Graham1 wrote: »

Unfortunately NGU8 (the original poster's graph) is a Nymex (New York) contract price, for delivery in September, delivery in Louisiana. It might be a rough guide for UK wholesale prices but I wouldn't rely too much on it.

Thanks to the OP for the chart and to Graham1 for the description - Could one of the Bloomberg users have a look and see if there's a chart for natural gas for UK delivery? Ideally, it would be great to have a chart of forward prices at 3 month intervals (a bit like the forward curve you can get for the short sterling future) so that we can see how the curve has moved over, say, the past year? Is this possible?

Thanks in advance as I know it can be a bit of a struggle to find stuff on Bloomberg.
Sam

amcluesent

>the British gas advert is now replacing previou cap with a fix<

Sneaky. TBH when EON is encouraging take-up of PP17, you do wonder if they know something we don't!