Why energy will never be cheap again

By Florian Ritzmann


Wholesale prices for energy have taken a tumble recently and, with the UK economy in full retreat, expectations for price cuts on gas and electricity have risen. Suppliers have pushed through 40% increases in 2008 by blaming sky-high oil prices - so now that the price of oil has halved, the price you pay for your gas and electricity should follow, right?

Wrong.

There are three powerful reasons why you will keep paying more for your gas and electricity through 2009 and beyond.

A new gas Opec to dictate prices

The price of gas has historically followed the price of oil, not least because many oil fields also produce natural gas as a byproduct. The world's leading gas producers (Russia, Iran and Qatar account for 60% of world natural gas production) have set up a new Opec-style gas cartel over the past two years. This new organisation, whose charter will be finalised in Moscow this month, will give its members the power to decouple the price of natural gas from that of oil.

The creation of a gas Opec illustrates how energy-exporting countries have tightened their control over pricing in recent years, thus making a return to cheap energy highly unlikely. And because the UK uses natural gas to produce 40% of its electricity, prices there will continue to rise too.

The cost of the UK's energy policy

The UK government needs to secure the long-term supply of energy to Britain but without sacrificing the environment. Renewable energy and nuclear power therefore loom large in the government's energy policies. Creating clean new energy generation capacity is necessary now that the UK's own North Sea resources are declining. However, the extremely high cost of diversifying the UK's electricity generation capacity will be paid for by the UK energy consumer through rising bills for decades to come.

Suppliers have never reduced prices in the past

After record price increases in 2006, energy suppliers in early 2007 trumpeted price cuts of between 10-15% on the back of falling wholesale energy prices. But with 2007 wholesale prices down from their 2006 peak by as much as 65%, it is safe to say suppliers made token (and short-term) price cuts only. The balance of the benefits found its way into the pockets of the suppliers, who all announced blockbuster profits in 2007.

The simple lesson is that there will be no letup to rising energy prices for the coming years if not decades:

- Those countries who give us our energy have gained control over the price at which they sell it.

- To reduce our dependence on energy exports and to generate clean electricity will cost an astronomical amount.

- Energy suppliers are businesses, not friends.

Short and simple advice to UK consumers

Switch energy supplier using independent price comparison services. Suppliers do compete for your business and constantly introduce new cheap tariffs to attract new customers. Savings are attractive - you can currently shave 20% (that's nearly £200) off the average bill just by switching to the best deal.

Once you have switched you need to stay on your toes, as your supplier will not reward your loyalty. Suppliers will always offer the best deal to new customers, not their existing ones.

Use less energy

Visit the excellent Energy Savings Trust for a one-stop shop to help take control of your energy consumption. Learn where and how most of your energy is consumed at home, and then take steps to cut back. The site even offers a very helpful calculator to help you.

So switch now and use less energy before the worst of the winter bills arrive on your doorstep.

This article appeared on MSN