Europe faces bulging energy bills because of oil

Crude oil prices have doubled in the last year. As a result, wholesale forward and gas power markets have also surged to record highs in the last few weeks and are showing little sign of retracing in the foreseeable future. “Over the coming months and possibly years, the pressure on retail prices is going to be upwards,” Paul Golby, the chief executive of E.ON UK said on Tuesday. “If you look at the moment how high wholesale prices have gone they have accelerated significantly ahead of where retail prices are so the pressure clearly is there ... From a fundamental point of view I don’t see what is going to change.” The head of one of Britain’s biggest energy suppliers would not say by how much and when bills would have to rise but analysts expect all British suppliers to hike their retail prices soon.

Very little electricity in Europe is made by burning oil. But, unfortunately for Europeans already paying much more to fuel their cars and to feed themselves, the prices of coal and gas used to generate most of the power are also linked to crude. Tight global coal supplies and increasingly stringent environmental constraints are adding further pressure on power prices and it is only a question of time before the utilities pass on the increased costs to their customers.

LINK TO OIL PRICES

“We are expecting a further round of price increases. The question is whether there will be another one in three or six months time,” Damien Cox, a European energy consultant at John Hall Associates in London said. “If oil keeps rising ... a further set of increases is bound to take effect, so that’s obviously going to hit consumers.” British householders have already been hit with double-digit percentage increases in their energy bills this year because of the rise in wholesale costs in the second half of last year. Suppliers from Hungary and Poland to Spain and Germany have also already announced increases but wholesale costs have risen more markedly since the start of 2008 and many analysts see more hikes on the way.

Germany’s biggest gas supplier E.ON Ruhrgas said in late May it would increase prices by over 10% by year end, while the two biggest utilities in the Netherlands, Essent and Nuon, have said gas and power bills would rise at the start of July. “As the gas price is linked to the oil price, the recent increase works directly through into the gas price and indirectly into the electricity price,” Nuon said. Even in France and Spain, where consumers can take some shelter by signing up to government-set tariffs, prices have risen, albeit less markedly than in those countries with fully opened markets.

Spanish energy regulator CNE has recommended the government raise power prices by 11.3% in the Q3 and scrap cheaper nigh-time rates, while French consumers have seen their gas bills bulge by about 10% this year after state-owned Gaz de France asked the government to raise them. Only the 99% of French households, that benefit from relatively low state-set electricity prices look like being sheltered from the wave of surging prices, largely because the French government responded to the oil shocks of the 1970s by building Europe’s largest fleet on nuclear power plants. Their electricity bills have been unchanged since August 2007 and look immune to the latest oil crisis. “In the contract that we have with the state, we are not authorized to raise tariffs above the inflation,” a spokesman for state-run power giant EDF said. (Reuters)