British Gas Offer

[Zinzan]

Hi there

I notice British Gas are offering to protect energy prices until 2009. Has anyone taken them up on this offer and are there any hidden costs involved that I should know about. Seems to good to be true!

Regards

Billy

[Peter]

Dont know the specifics but generally speaking here goes.

British gas approach an oil and gas broker for an 'option' price. In this case the option would say something like, all prices above 'x' will be repaid (to british gas) for a ,say, 4 year period. For this BG will pay a premium, normally upfront, price determined by how close the price is to the spot price, how long the option lasts (3 to 4 years is a LONG time), and the volatility over the spot gas price. (If gas prices have a recent history of being volatile then the option price will be higher) So BG splash out a few million and need to recoup it from you. There are 2 ways to do this.

1. Either you pay slightly more than the current rate quarterly for the time period or

2 They instead fix the price for the period, ie you wont pay higher prices but neither will you recieve lower prices ( in which case BG will sell the 'put' option, receiving enough money to pay for the first option,the call option, but having to pay any monies when gas falls lower in price) Call option = right to but at x when price goes above Put option = right to sell at x when price goes below

My guess.. BG buys calls .. sells puts for net zero and offers you a fixed price.

Nothing wrong unless prices fall substantially. (Simelar to fixed price mortgages)

P

[powerstation]

If you sign up to the deal and then within the 3yrs decide to cancel or move suppliers they charge you £50 so be aware.

Peter

[ARWadsworth]

I signed up to a similar offer in Nov 2004. My prices were locked from April

2005 to April 2007. The price I was locked to in 2005 was at 3.5% above the standard rate. I consider myself a winner on the deal following the 2005 and 2006 price increases.

Look at

or

if that fails

Adam