Rumors of a British Gas price increase a case of when, not if

Share |

23 September 2013, Gas, Electricity

oilandgasobserver archive

Year-on-year (thus removing seasonal factors), wholesale prices for power and gas (month ahead) increased by 10% and 9% respectively to August 2013, and since British Gas's last price rise announcement in October 2012 (implemented in November) prices have risen at an even greater amount percentage wise. Price rises for consumers are always a bitter pill to swallow at a time when living costs are relentlessly increasing, but even a corporation the size of British Gas is not immune to increasing external costs and has to buy a large proportion of the gas and power it sells on the wholesale market. The trade requirement for power is estimated to be higher than 40% in 2013 and nearly 50% for gas (source: Datamonitor's Structural Balances of Key Power and Gas Retailers in Great Britain [May 2013, EN00016-002]).

2012 also put increasing pressure on the profitability of British Gas's (technically Centrica's) wholly owned natural gas-fired generation assets. The relatively low price of coal has kept wholesale power prices from rising too fast, which has left assets burning higher-priced natural gas struggling for profitability. Due to this, British Gas has been unable to cross-subsidize its retail business with generation profitability, as the generation margin bottomed out in 2012. The generation margin for British Gas is estimated to have fallen to below 5% in Q3 and Q4 2012 (source: Datamonitor's Generation Margins in Great Britain 2007-12 [September 2013, EN00016-003]).

The above factors mean there has been huge pressure on British Gas's retail margin during 2013, with its latest interim financial reports revealing that the residential operating margin had fallen to 6.5% from 7.2% a year earlier - considerably lower than other industries such as telecoms. While British Gas may attract criticism if it is the first to break cover and announce a 2013 price rise, it should be remembered that it also has to comply with government initiatives such as CERT, CESP, ECO, and the smart meter rollout while dealing with the margin constraint.

Lastly, although this analysis has focused on British Gas, all of the Big Six face similar challenges (although British Gas's may be more acute), and it will simply be a game of follow the leader in terms of price rises - it's just that nobody wants to be the leader.

Source: MarketLine

More Gas Commentary

More Electricity Commentary

Recent commentary