Tony Blair admitted that Britain faced "difficulties" over soaring gas prices today but insisted there was no shortage of supply and dismissed accusations that the government had failed to prepare for the long-predicted Arctic winter.

The spot price of wholesale gas has risen 500 per cent in three weeks, to £1.70 a therm, already causing some of the UK's biggest power stations to reduce output. Businesses that use gas for fuel or as a raw material have warned that they could be forced to cut production or close, if bottlenecks in supply are not resolved.

The Met Office says that the UK could be on the brink of the coldest winter in a decade. Experts warn that consumers will feel a knock-on effect, with utility bills soaring by an average of £85 a year by January.

At Prime Minister's questions today, Mr Blair said: "Of course there are going to be difficulties with gas prices because of the cold winter we are likely to have."

Michael Howard, the Conservative leader, claimed that failing to guarantee gas supplies was another example of the "incompetence" of a Government now unable to cope with the challenges facing the country.

He told MPs: "Four weeks ago the leader of the House (Geoff Hoon) when asked if the Government could guarantee energy supplies to business and domestic customers this winter said: ‘Yes, they can’. Does that guarantee still stand?"

Mr Blair replied: "There is not, as far as we are aware, a problem for domestic users. There is a problem for high level industry users. But the only way of dealing with that is to make sure the industry itself can get as much demand as possible from abroad."

He added that there was no way the Government could guarantee prices in an international market, and asked whether Mr Howard was advocating a return to a centralised command economy.

Mr Howard retorted: "The CBI and others have been warning for months of possible gas shortages. Why has the Government ignored them for so long? On flu vaccines and gas supplies, the Government has proved thoroughly incompetent.

"This is a Government on its skids and you have lost your grip and are quite incapable of dealing with the challenges the country faces."

The exchanges were followed by an emergency statement from Malcolm Wicks, the energy minister, who assured the House that he had held meetings with the oil and gas industry and there was nothing to worry about. He accused the Tories of scaremongering, adding: "To suggest we are not prepared is total nonsense."

Paddy Tipping, a former Labour minister, urged Mr Wicks to take the opportunity to "deny scaremongering and to confirm that, even with the most severe winter, gas supplies to domestic customers will continue".

Mr Wicks said: "I am very happy to confirm that. The domestic customer is not threatened at all. The facts are that so far this winter there have been no gas shortages and supply and demand have remained in balance."

But Bernard Jenkin, a Conservative MP, said that industry would be "absolutely astonished" by any suggestion that there was no shortage. "The failure of the security of gas supplies reflects the failure of eight years of the government’s energy policy," he went on.

Mr Wicks said: "There may be one or two people trying to talk up a crisis when it comes to gas prices but the energy companies, most of business, the Department of Trade and Industry and the National Grid are not part of that."

Liberal Democrat trade and industry spokesman Norman Lamb warned: "The lights might not be going out, but the cost of switching them on is likely to rise massively, plunging millions of people further into fuel poverty. The Government has failed to tackle energy waste and failed to prepare adequately for the impact on industry this winter."

The Department for Work and Pensions disclosed that more than £60 million could potentially be claimed in cold weather payments if the next few months turn out to be as cold as the forecasters have suggested.

The extra payments are made to claimants who are pensioners or have young children if the average temperature falls or is forecast to fall below freezing for a week or more.

Prices have surged both for "spot" gas - for immediate supply - and for advance deliveries until next March, according to Spectron Group, a marketplace for energy users. The spot gas price rose by a third yesterday to a record £1.70 a therm - a fivefold increase in three weeks.

Most industry users arrange long-term supplies at a fixed price, but companies which have not pre-ordered or need to top-up their supplies must pay the inflated spot price. It is these firms which are cutting back on production.

Even long-term orders are affected. Gas for delivery in January cost 93p per therm on Monday and if you wanted to hedge your position for the first quarter of 2007 you would still have to pay 76p. Industry in other countries appears to be suffering less - the Dutch spot price is 50p per therm, and German utilities are paying about 40p under a long-term contract from Norway’s giant Troll field.

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