The Reasons Behind The British Gas Price Rise

Four Reasons Behind The British Gas Price Rise

Utility providers blame rises in wholesale gas prices, Government policy, the cost of using the National Grid network and investment in infrastructure for their tariff hikes.

But energy suppliers are criticised when they do not bring tariffs down when wholesale gas prices drop and are frequently accused of protecting their profits.

Here we take a look at the reasons blamed for higher household bills.

:: Wholesale gas prices

More than half of domestic gas bills and a quarter of business customers' bills are made up of wholesale energy costs, according to energy watchdog Ofgem.

Wholesale gas prices (the cost to the supplier) have risen in recent months due to a combination of tight supply and stronger demand. For example, in the winter more households put their heating on which means there is a greater demand on oil resources, and this pushes up prices. Infrastructure firms such as National Grid have warned that domestic British suppliers are providing less, increasing a reliance on pricier imports and storage withdrawals.

In addition, the price of wholesale gas is often related to the cost of oil. Ofgem estimates that the link between oil and gas prices is responsible for around 30% of changes in future gas prices. Oil prices are around 25% higher than they were in June.

But energy companies buy their wholesale gas well in advance so a rise in wholesale and retail prices may not necessarily run concurrently. British Gas has said wholesale gas prices are 13% higher for this winter.

It adds that delivery costs account for 22% of the average gas bill, alongside 11% for government charges and 9% in operating costs. Around 6% is kept in profit.

:: National Grid costs

The cost of using National Grid networks to distribute electricity and gas to customers' homes, which represent around 25% of a typical bill, is 9% higher than a year ago, according to supplier SSE. But this is being passed on to the consumer through rising bills and is expected to affect all companies.

:: Government policy

The cost of mandatory environmental and social initiatives that suppliers are required to fund and pass on to customers, such as the Carbon Emissions Reduction Target and the Warm Homes Discount, are 30% higher than they were a year ago and now represent around 10% of a typical bill, again according to SSE. This is also expected to spread to other suppliers.

:: Investment in infrastructure

Energy suppliers are under pressure to invest in their infrastructure to prepare for future increases in demand. British Gas, for example, recently announced a £1.4 billion investment with GDF Suez to develop a major North Sea gas field off the coast of Norfolk.

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