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Consumers at the Endpoint of Liberalisation: An Analysis of UK Gas Prices 2000-2005

This analysis examines the trends in UK gas prices from 2000-2005, focusing on the impact of liberalisation on business and household consumers. It explores the cost components, price differentials, and the role of competition in shaping gas prices.

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Consumers at the Endpoint of Liberalisation: An Analysis of UK Gas Prices 2000-2005

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  1. Consumers at the Endpoint of Liberalisation: An Analysis of UK Gas Prices 2000-2005 Professor Philip Wright FEI The University of Sheffield 4ème Colloque International du réseau MONDER: “L’OUVERTURE A LA CONCURRENCE DANS LE SECTEUR DES INDUSTRIES DE RESEAUX : LES CONSOMMATEURS SONT-ILS SATISFAITS ?" Martigny, 8 au 11 janvier, 2006

  2. UK GAS PRICES SINCE PRIVATISATION

  3. KEYPOINTS ABOUT LONG-TERM PRICE TRENDS FOR BUSINESS AND HOUSEHOLD CONSUMERS • Average industrial/commercial prices declined by over two thirds as UKCS overproduction caused a slump in prices during the mid-nineties • But prices have been on a rising trend since 2000, also exhibiting more pronounced seasonal fluctuations • Domestic prices declined gently by about 30% over 19 years(c.2% per annum), in other words at a rate that could easily have been mimicked under state ownership. They are also now on a rising trend.

  4. Average Gas Price for Firm Delivery: BLACKAverage Gas Price Received by Producers: BLUEFront Month Futures Prices: RED

  5. KEYPOINT (1) ABOUT BUSINESS GAS PRICES SINCE 2000: DRIVEN BY WHOLESALE GAS COST BUT ONLY TO THE EXTENT ALLOWED BY COMPETITION • Thus the margin available to cover transportation and supply costs has been squeezed • If suppliers were paying the beach price cost for their gas (the average price received by producers) the average firm delivery final price might just about have covered their transportation cost, but not supply costs • If they were paying a price linked to the futures price the situation has been worse - sometimes not even transportation costs could be covered • Probably only the largest loads offered any prospect of profitability, indicating why e.g. BP exited the smaller end of the industrial and commercial market in October 2004

  6. KEYPOINT(2) ABOUT BUSINESS GAS PRICES SINCE 2000: DIFFERENTIAL BETWEEN BEACH PRICE AND FUTURES PRICE IS THE PRICE OF LIBERALISATION • Liberalisation has involved the phasing out of long-term ‘beach’ contracts and their replacement by gas market indexed contracts for delivery to a notional National Balancing Point (next slide) • And therefore accompanying risk management by way of forward and futures trading • Winter futures prices have tended to rise dramatically, reflecting increasing uncertainties about winter supplies and, most recently, demand as well • Liberalisation has therefore created a risk management ‘premium’ represented by the red area in the preceding graph - which particularly affects business consumers

  7. PRICE DIFFERENTIALS IN THE BUSINESS GAS MARKET: SMALLER SCALE CONSUMERS FACE HIGHER PRICES

  8. GAS PRICES TO HOUSEHOLDS:FROM REGULATED PRICE REDUCTIONS TO FREE MARKET PRICE INCREASES

  9. KEY QUESTIONS ABOUT FULLY LIBERALISED DOMESTIC GAS PRICES Were the real increases in prices after 2000 justified by: Increases in the wholesale cost of gas? Increases in transportation costs? Increases in supply costs? Deterred by competition?

  10. COST COMPONENTS OF DOMESTIC GAS PRICES (1)

  11. BETWEEN 2001 AND 2004 WHICH COST COMPONENT HAS HAD MOST INFLUENCE ON DOMESTIC GAS PRICES? • Not wholesale price of gas until 2004? • Not transportation costs which appear to vary little? • Supply costs?

  12. COST COMPONENTS OF DOMESTIC GAS PRICES (2): THE DATA

  13. PRICES, SUPPLY COSTS AND THE CORPORATE STRATEGY OF BRITISH GAS • It was not just the wholesale price of gas, whether this be measured by the beach price cost or the futures price, which has propelled domestic prices upwards. Discretionary supplier behaviour towards domestic consumers has also been important. • Despite losing 819,000 gas customers between 2003 and 2004, the 2004 price rise which this is attributed to also helped British Gas to increase its operating margin on residential energy sales from 2.6% to 4.6%, thereby raising its profits on this segment of the market by 83% from £136 million to £249 million. • By the same token, competition, as evidenced by switching, has been an ineffective deterrent.

  14. OPPORTUNISTIC COMPETITION FOR DIFFERENT CONSUMER GROUPS: Highest minus Lowest Domestic Unit Pricesby Customer Category

  15. CONSUMERS AT THE ENDPOINT OF LIBERALISATION: CONCLUSIONS • Business consumers and their suppliers are having to cope with gas cost price risk - to which they are more vulnerable than domestic consumers. Competition in this segment of the market has mitigated the risk for business consumers but also simultaneously damaged the ability of suppliers to operate profitably unless they are also successful traders. • Domestic prices also reflect the fact that domestic consumers are having to finance price risk and help guarantee/underwrite profits for suppliers. Competition has not been a deterrent and has also been opportunistic with respect to different consumer groups.

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