Earnings at British Gas group Centrica are set to tumble by hundreds of millions of pounds as the price it charges for household energy fails to keep pace with rocketing wholesale gas prices.

"Group operating profit for the first half of the year will be materially lower than the first half of 2007," the company warned shareholders at its annual meeting today.

Centrica, led by chief executive Sam Laidlaw, blamed the profit alert on "exceptional conditions" in its British Gas residential business which is likely to see large rises in domestic bills to restore profitability.

Consumer groups believe British Gas will increase bills some time this summer on top of the 15% hike in January and that it is likely to hit households with a further rise at the end of the year.

The company is leaving few people in doubt that there will be increases.

"Looking to the full year, forward wholesale gas and power prices in the UK remain stubbornly high," the company said in a statement.

"The wholesale gas price for the second half of this year is double that experienced during the second half of 2007 and for the fourth quarter of this year it is over 80 pence per therm, compared to 44 pence for the same period last year. While the current outlook for gas prices does create a challenging environment for energy suppliers, we will take the necessary action to deliver reasonable margins in the retail business."

Centrica's business model means its operations hedge each other so when retail profit margins are under pressure, Centrica's Morecambe Bay and North Sea gas production operations kick in with far higher profits.

However, the company warned today that it is locked into 17 major historic supply contracts with other power generators and big industrial companies fixed at previously low prices.

That means that as the wholesale price rises so Centrica's losses on those contracts widens.

The company previously warned those losses could be as much as £200 million but analysts now believe they could reach £400 million.

Centrica also warned increased gas production means higher taxes to the Treasury and it is now warning its tax bill could rise to 55% from 40% last year.

In the first half of last year Centrica made operating profits of £1.24 billion but nearly half of that came from British Gas's residential business.

Analysts believe earnings for the year are likely to fall by as much as fifth.

NUCLEAR HOPE
Centrica's chances of taking part in the £20 billion new generation of nuclear build have grown after it became increasingly clear that favourite EDF is unlikely to be allowed to take sole control of the current fleet of reactors run by British Energy. French electricity monopoly EDF which also owns the old London Electricity, has tabled a bid of up to £10 billion for British Energy, a move that would secure the land on which new nuclear build could take place.

However, that deal would run into competition issues as the enlarged business would own more than 25% of the UK's generating capacity. Sources say the Government wants Centrica to be part of carve-up of new nuclear because it is a British company.