Consumers could see largest ever increase in energy bills

Consumers are being warned to brace themselves for further energy price rises, which could, in a worst case scenario, result in an unprecedented 46% or £415 being added on to household energy bills this year, says uSwitch.com, the independent price comparison and switching service.

Suppliers have already increased prices by 15% or £136 on average this year, but have since seen a marked decline in the trading environment. uSwitch.com says that this makes a second and third round of price increases extremely likely, with the smart money on a 10% or £105 increase by late summer and a further 15% or £173 increase early next year.

However, if Centrica's statement is indicative of the pressure that suppliers are now coming under because of the high price of oil and forward wholesale prices, then both price rises could be pushed through this year instead. If so, households could end up facing annual bills of £1,327 during 2008, rather than 2009. To put this into context, at the beginning of 2008 the average household energy bill was only £912 and, at £1,327, energy bills will have doubled since 2005.

Centrica refers to this pressure in its statement, saying that the year-to-date has been: "...dominated by high wholesale gas and power prices in the UK driven by record oil prices, rising demand in Asia for the available Liquified Natural Gas and a lack of imports from Continental Europe. On average the month-ahead prices for gas and power were 92% and 100% respectively above those for the same period of the previous year." It says that these market factors have caused British Gas' profit margins "to be squeezed to levels below our long run expectations."

It also warns that these conditions look set to continue, saying that forward gas and power prices remain "stubbornly high." Wholesale gas prices for next winter are at an average of 85 pence per therm and Goldman Sachs has warned that crude oil prices will hit $200 a barrel.

If energy bills do increase by 46% in 2008, it will be a new record. The previous record was in 2006 when household energy bills shot up by 38%. At that time, the oil price averaged $65.1 per barrel and the forward wholesale price was 74.94p per therm. However, there was no credit crunch, so arguably consumers were in better shape to deal with the increase to their bills than they may be now.

Tim Wolfenden, Head of Home Services at uSwitch.com, says: "If Centrica - the parent of British Gas, Britain's biggest supplier - is feeling such acute pressure over pricing then it's safe to say that others are feeling it too. Suppliers have been holding firm, but the cracks are beginning to show. It's pretty clear that something has to give and that household energy prices are going to be shooting up again this year.

"Suppliers usually give consumers breathing space by introducing a couple of smaller price increases rather than hitting households in one fell swoop. The pressure they are under shouldn't be enough to change this pattern, but it could be enough to force their hand sooner. If it does, bills could hit £1,327 this year rather than next. For consumers this would mean an unprecedented 46% increase in household energy bills in 2008.

"Given this scenario fixed rate energy plans are starting to look like a potential lifeline for worried consumers. Take up has traditionally been low - there are only around 5.7 million energy customers on fixed price plans. Fixed plans are currently 2% or £19 more expensive on average than standard plans and 10% or £96 more expensive than online plans. However, their biggest strength is the security they offer at a time of rising prices, especially for those struggling with household bills or on a tight budget - for this reason alone a lot of people will be warming to them this year."