Industry faces £1bn power bill as oil hits record high of $44 a barrel

UK plc is reeling from the knock-on effect of the soaring cost of energy production. Tim Webb and Clayton Hirst report

Soaring energy costs are hitting companies and consumers where it hurts - in the wallet.

Soaring energy costs are hitting companies and consumers where it hurts - in the wallet.

On Friday, the price of Brent crude for September delivery closed at a new record of $43.88 per barrel, its highest since the contract began trading in 1988.

But it's not just high oil prices that are causing so much pain. Gas and coal prices have rocketed too, which also makes electricity much more expensive to generate.

New research, carried out by energy consultancy EIC, shows that this month industry will pay an extra £1bn in the year ahead on electricity, an increase of almost one-third compared with last year.

EIC analyst Daniel Norton said that of the estimated 10,000 industrial companies in the UK, around 6,000 typically negotiate their annual electricity bill at this time of year.

Companies are having to pay around £32 per megawatt/hour of electricity for annual contracts starting in October, against £24MW/h last year. As a result, the total cost of annual electricity bills has gone up by £1bn to £4.5bn, Mr Norton said.

EDF Energy, the French-owned group that owns London Electricity, is also preparing to increase gas and electricity prices for consumers "sooner rather than later". This follows price hikes already announced by rival energy groups Powergen, Scottish Power, Centrica and Scottish & Southern.

Coal and gas generators, which provide around two-thirds of the country's electricity, are being hit by rising fossil fuel prices. Gas prices, which tend to track oil prices, are around a third higher than last year, while coal prices are up a fifth since January, largely because of higher shipping charges. This has forced the generators to pass on higher costs to companies and consumers.

But a spokesman for EDF Energy added: "Higher electricity prices are not a bonanza for generators. The supply market is very competitive. It's not always possible to pass on these costs."

Higher energy costs are being passed on to consumers in other ways. Tomorrow, Parcelforce will introduce a 2 per cent surcharge on all deliveries because of higher petrol and jet fuel costs. Electricity prices will be nudged yet higher with the introduction of the European emissions trading scheme on 1 January 2005. The scheme is designed to penalise companies producing high carbon dioxide emissions and reward those who reduce output.

A report commissioned by the Department of Trade and Industry and published last week predicts that the scheme will add a further 5.6 per cent to domestic electricity prices and around 12 per cent for large industrial consumers.

But Jeremy Nicholson, head of the Energy Intensive Users Group, which represents heavy industrial companies, said the figures underestimated the real cost of the carbon emissions trading scheme. Of the estimated 30 per cent rise in electricity prices, he said "the overwhelming bulk" was down to the scheme, rather than rising gas and coal prices.

He added that his members were less able to pass on higher energy costs to customers than the generators. "I won't be shedding a tear for the electricity industry," he added.

Companies are being forced to be more flexible when they buy in electricity to avoid paying the highest prices. Mr Norton continues: "We are seeing companies take a variety of options to ease the pain of these price rises. Some are signing two-year contracts because electricity prices are expected to continue escalating. Companies can also trade flexible contracts in the market and cut their losses by timing their purchasing decisions wisely."

On Friday for example, managers at MG Rover met to discuss their energy strategy. Tony Osborne, energy manager at its Longbridge plant, said that usually the car manufacturer, which spends around £10m a year on electricity, water and gas, would lock itself into one-year or 18-month supply contracts.

But because energy prices are so high, it may buy in energy one month at a time in the hope that prices fall. Mr Osborne is particularly dreading the final quarter of the year. "It will be devastating. Part of the problem is that we have had it good in the past. But younger managers can't remember the 1970s and 1980s, when oil and gas prices were this high."