The Future For Energy Prices

After a year of horrible price hikes, there are rumours that energy costs could soon be coming down. But are our gas and electricity bills likely to fall? And if so, how soon -- and how far?

This article was first sent to Fools in an email as part of our Afternoon email campaign.

This summer, I -- along with much of the British population -- looked on in horror as gas and electricity suppliers imposed an astonishing series of price rises on their customers.

The hikes had been coming for a while, and reports that they were imminent sparked a scramble for affordable capped energy tariffs. But things looked pretty bleak for those who missed out on these cheap deals -- and even worse for the many people who would be plunged into fuel poverty by price rises.

However, energy `inflation' has now begun to fall. So could hope be on the horizon?

The good news

Back in July, when the price of a barrel of crude oil peaked at a whopping $147, the rocketing price of this commodity was a key factor in causing gas and electricity price hikes. What's more, it fuelled fears that further increases would be necessary in spring 2009.

Fast forward a few months and things look very different. By the beginning of November, a barrel of crude oil cost just $50 -- and as a result, petrol prices were back below £1 per litre for the first time in almost a year.

This serious slide in the price of oil, combined with a tumble in the wholesale price of gas and electricity, certainly looks like good news for consumers. Energy suppliers are already under pressure from charities, energy watchdog Consumer Focus and even MPs to pass on savings to customers, in a similar way to petrol retailers.

Earlier this month, Scottish and Southern Energy (SSE) released its financial half year report, and at the same time announced its intention to reduce prices early next year if possible.

Thus, the worry that gas and electricity prices will increase again in January has given way to growing confidence that we've seen the last of energy price increases -- and to the hope that we'll soon see our bills shrinking.

But is this hope misplaced?

The bad news

It's crucial to remember that only SSE (and now British Gas and E.ON) have suggested they may cut costs for consumers in the New Year. not all of Britain's `Big Six' energy companies have made this pledge.

What's more, the energy providers that have promised potential cuts have made it clear that any reduction in gas and electricity prices is conditional on further, sustained falls in the wholesale price of energy. It's impossible to be 100% certain that these will happen -- especially because gas and oil producing companies seem determined to work together to keep their profits high.

Furthermore, it seems unlikely that drops in the wholesale cost of energy will be quickly passed on to customers. Because gas and electricity companies buy energy on the wholesale market many months before they sell it, supplies for this winter have already been purchased and paid for. Even if wholesale costs continue to decrease, there could be a considerable time lag between price falls for energy providers and those that may be passed on to consumers.

Are capped tariffs still a good idea?

This summer, I urged Fools to opt for capped energy tariffs which would protect them from the price rises announced in July and August. If you managed to get one then, you will already be saving money -- and should continue to do so even if prices fall slightly next year.

However, I don't believe the capped tariffs currently available represent a good deal for energy customers. The premium you'll be charged for locking in to a set price (10 - 15%) will mean you pay more for your gas and electricity now -- and you'll also miss out on any future price falls.

What should I be doing now?

It's important to be aware that even if the price we pay for gas and electricity is to fall, costs are unlikely to go down today, this week, or even this year.

I believe that if we eventually benefit from reduced energy costs, we could be waiting several months for cuts to be announced. And in the meantime, the days are getting darker and colder.

Switching your supplier now is the best way to ensure you're getting the best deal on your gas and electricity, which should be a top priority as winter begins to bite. It should take just a few minutes to search for a cheaper option, and you could save more than £200 over a year via The Fool.*

Is there any hope for price cuts?

I'm a natural optimist, but I must confess I've a fairly low opinion of Britain's Big Six energy companies.

I think consumers could benefit from lower energy prices in 2009 -- but the belief that's begun to blossom in big price cuts could be misguided. I'd hate for the assumption that prices will fall to prevent people from paying less for their gas and electricity in the here and now.

Let's face it: we're all going to need more than hope to keep us warm this winter.

Therefore, taking steps to cut our own energy costs makes more sense than trusting others to do it for us.

* Customers who stored their details and received a savings quote from The Fool's gas and electricity service were shown an average savings quote of £206. Dates from 01/10/2008 to 08/10/2008, number of total quotes stored was 7,510 quotes.

More: Avoid These Energy Rip-Offs This Winter! | Eleven Clever Ways To Cut Your Energy Bills | Get Help With Your Energy Bills

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