British Gas statement on energy prices

Centrica plc, confirms that its wholly owned subsidiary, British Gas, has today issued a statement regarding energy prices, a copy of which follows.

British Gas’s pricing policy is to fully recover the wholesale costs of energy from its customers, respecting both the level and volatility in the forward curve and the competitive dynamics of the market. On this occasion, it has chosen to extend the time over which it will recover wholesale costs and as a result, British Gas profits in the second half will be significantly reduced.

There is considerable risk and volatility in the wholesale energy markets in the fourth quarter, and Centrica believes, based on its latest forecasts for wholesale prices, that Group earnings for 2005 will be towards the lower end of market expectations.

British Gas statement

British Gas, today announced it is to increase domestic energy prices. This follows recent moves by Powergen (E.ON) and EDF Energy.

The 14.2 per cent increase in gas and electricity prices takes effect from 19 September 2005 and comes on the back of record highs in the cost of wholesale gas driven by soaring oil prices and declining North Sea gas reserves.

An independent report from Global Insight 1 this week found each $10 per barrel increase in the price of crude oil gives rise to a 7 p per therm increase in wholesale gas prices – or an extra £50 a year2 on the average domestic gas bill. Global Insight found that the oil-gas linkage resulted from non-liberalised markets in Europe and could cost the UK an additional £10 billion in 2006.

The current forward price of gas for the second half of 2005 is 50 per cent above the same period in 2004 and 31 per cent above the market price for the first half of 2005. For electricity, it is 61 per cent and 43 per cent higher respectively.3 British Gas is not fully passing through these higher commodity costs in this price increase as it continues to try to mitigate the impact on customers, including an intense focus on driving down operating costs.

Amid concern about the impact of rising energy costs on the fuel poor, British Gas will be offering support to a quarter of a million of its most vulnerable customers through a rebate4 of up to £60. For the average customer, this will offset the impact of the price increase this winter. This is the biggest single social initiative carried out by any UK energy company. It comes on top of the existing £10 million British Gas Energy Trust Fund which is helping customers in debt who need financial assistance to pay their bills.

The one million customers who signed up to British Gas’ Price Protection, which caps energy prices until 2007, will not be affected by the price increase until April 2007. British Gas is now launching a further fixed price product, enabling dual fuel customers to fix their energy prices until 2010 at no extra cost5.

Mark Clare, Managing Director, British Gas, said: “We are no longer an energy island - spiralling world oil prices are now having an unprecedented impact on the cost of gas as the UK is now dependent on imports. In these difficult times it is more important than ever that our customers take action to save energy and so reduce their bills. British Gas already invests £130m a year in energy efficiency measures for customers and we will now offer additional incentives for those that are prepared to take action. We are also offering a winter rebate to offset the cost of this increase to our most vulnerable customers who would otherwise be hit hardest.”

Looking forward, British Gas warned that European Union member states must urgently open their markets if UK consumers were not to suffer even higher prices. Most major gas pipelines and storage facilities on the Continent are owned by monopolies or near monopolies and are in practice inaccessible to UK suppliers wishing to transport gas across Europe.