Gas Prices to Fall

The first of the UK’s big energy companies has announced that they will be cutting their gas prices. EDF Energy has said their gas customers will be seeing a 5% reduction in bills from February, making up for some of the 15% increases that have come over the last two years due to increased wholesale prices.

After rising over the last couple of years, wholesale gas prices have started to decline. The main two reasons for this has been the impact of the economy is general and a mild winter, meaning extracting gas has been easier and has therefore cost less. Purchasing gas has cost the energy companies less so they are able to pass this onto their customers.

It is almost certain that other gas providers will follow in reducing their prices, otherwise they risk being left behind and losing customers. A couple of small energy companies have reduced their prices, but as of 13th January, none of the other large providers have followed suit. Price reductions are expected to be announced over the next few weeks.

Wholesale gas prices can fluctuate significantly. Many factors across the world can impact this, from economic factors to natural disasters in relevant areas and whether conditions impacting the ease of extracting gas. Therefore, it is not always easy to predict whether prices will go up or down over the long term, or by how much. Consumer prices tend to head in the same direction as consumer prices, although there is usually a bit of a delay. This comes because the gas being sold to consumers at any particular time has been bought in advance by the gas companies.

The EDF Energy reduction in prices has been welcomed by energy consumer groups who have been lobbying for the wholesale prices to be mirrored by consumer prices. This will please many customers who are having a financially difficult time due to the economic problems affecting the country and much of the world. The 5% reduction in prices, and those expected to follow from other providers, will be a relief to many.

From a gas provider’s points of view, there are advantages and disadvantages to being the first to reduce prices. If others do not reduce their prices it obviously puts them in a strong position. In practice it depends on how long it takes others to follow and the size of their decreases. Many customers will stick with their current provider and wait to see the changes they make while others will switch due to the publicity of EDF Energy’s reductions. Reducing prices before the competition can entice customers to switch and it makes it seem as though they are leading the way in price reductions. It does give others an opportunity, though, to decide on their own strategies accordingly and potentially undercut them.

Because consumer prices go up or down as wholesale prices do, it is inevitable that other gas providers will follow EDF Energy’s decrease. Customers will wait with baited breath to see the reductions they get from their provider.

Andrew Marshall ©

Oil and Gas Law