UK on course for cheaper energy as gas imports flow

Consumers in Britain can expect several years of cheaper energy as new projects to import gas force down wholesale prices in Europe's biggest market.

Wholesale prices for this winter fell on Monday, bringing losses to 45 per cent in seven months, as unusually mild weather piled further pressure on a market weighed down by supplies through new import lines from Norway and the Netherlands.

Analysts expect houeshold bills, which have soared over the last three years in line with record wholesale prices, to start dropping towards the middle of next year and to trend lower as the UK gas market moves into oversupply.

Household bills won't drop before then because the gas which utilities are currently supplying to their customers was bought under annual deals signed earlier this year at prices way above the current wholesale market.

"From the spring onwards you could see household bills starting to drop," independent gas market analyst Niall Mr Trimble said.

"We had expected (wholesale prices) to fall as the new supply comes on stream, but it has happened earlier than we expected," Mr Trimble said.

Industrial consumers including some of Britain's biggest companies have seen reductions of 13-14 per cent in annual supply contracts starting in October next year, according to brokers John Hall Associates.

Mr Trimble said he expected the UK gas market to be oversupplied for about four years as new pipelines and terminals to import liquefied natural gas (LNG) counter a drop in production from the UK's aging North Sea fields, keeping bills under pressure.

By the winter of 2010, further declines in North Sea output are likely to create renewed supply tightness and start putting upwards pressure on prices.

The latest new pipeline, the BBL link from the Netherlands, was launched on Friday with capacity to import enough gas to cover about 15 per cent of UK demand.

The Langeled pipeline from Norway came on stream in October. US company Excelerate Energy aims to launch a project to import LNG in December or January.

"We have excellent baseload gas supply this year," Adrian Callinan, director of EU power & gas at Deutsche Bank in London, said.

"The key difference from last year is that we have so much spike responsive gas that we won't get (price) spikes this winter," he said.

Last winter a combination of falling North Sea output, unusually cold weather and a fire at Britain's biggest storage site sent spot prices in the wholesale market surging to record highs.

Mr Callinan took a bearish view of prices going forward, saying contracts for next winter were ripe for a significant drop.

The healthier supply outlook meant industrial consumers would not look to hedge their position by locking into fixed prices. Instead they would base gas purchases on floating prices linked to spot levels, Mr Callinan said.