Ofgem warns of '£2,000-a-year' household energy bills

Friday, 9 October 2009

Ofgem warns of '£2,000-a-year' household energy bills

Household gas and electricity bills could reach £2,000 without drastic action to shore up the UK's energy supply, regulator Ofgem warned today.

The watchdog said the country could have to spend as much as £200 billion to secure supply and meet environmental targets as it faces a capacity shortfall from soon-to-expire power stations.

Ofgem's review of Britain's energy market says household bills will rise between 14% and 25% from 2009 levels by 2020 in four scenarios which weigh up different levels of investment on infrastructure and the pace of global recovery from recession.

In its worst-case scenario - that of a strong resurgence in global economies along with missed renewable and carbon targets - the watchdog warned that consumer bills could peak at more than 60% higher by 2016 before falling back.

Consumer group Which? criticised the level of investment in energy infrastructure to date.

Fiona Cochrane, the group's energy campaigner, said: "The way consecutive governments have passed the buck on this issue is tantamount to negligence. By ignoring security of supply for so long, they've saddled consumers with what could be a colossal bill.

"We can't allow a situation where we have to choose between paying a king's ransom for our energy or face the lights going out."

The average household is currently paying £804 a year on gas and £443 a year on electricity, a total of £1,247 and this would rise to peak at £1995 a year if the gloomiest prediction proved accurate.

The cheapest of Ofgem's scenarios - involving a slow economic recovery coupled with global green stimulus packages - would see annual bills hitting £1421 by 2020.

Households have already seen average annual energy bills almost double since 2003 as wholesale prices have soared, although there has been a marginal decrease since last year's peak.

The Institution of Civil Engineers said there needed to be new thinking on the way infrastructure projects are funded.

Director general Tom Foulkes said: "Today's energy network is ageing and doesn't have capacity to meet current or future demands. However, those involved in industry and government have known this for some time.

"The real question is, where is the money going to come from to fix the problem?"

The report comes as the impact of recession is set to push public borrowing to a record £175 billion this year.

Ofgem said current rates of investment would have to more than double to meet the "massive levels" needed.

Consumer bills will be pushed up by the level of infrastructure investment and by the increasing cost of carbon - particularly if oil and gas market prices continue to rise as they have been since 2003, or spike sharply.

The watchdog's chief executive Alistair Buchanan said: "These are big challenges. Consumers are already enduring high energy prices ... Early action can avoid hasty and expensive measures later."

Environmental campaign group Friends of the Earth said a massive programme to cut energy waste would help minimise costs to consumers.

Spokesman Robin Webster said: "Ofgem's review is further evidence that failing to take urgent action to meet our climate change targets comes with an enormous price tag."

A Department of Energy and Climate Change spokesman said: "It's critical we maximise the effect of our planning reforms, clean energy rewards and efficiency measures to shift us away from fossil fuels and into a low-carbon mix."

The four scenarios include cuts in carbon emissions of between 12% and 43% from 2005 levels.

Ofgem said the potential 60% hike in bills by 2016 would be caused if wholesale gas prices spiked as a result of resurgent global economies competing for energy resources.

This scenario assumes that no new nuclear power stations become operational before 2020.

Gas dependence is predicted to increase "dramatically", especially if environmental measures are not fully successful.

The regulator also said "significant changes" may have to be made in the way we consume and generate power to manage the "variability associated with increasing reliance on wind power".

It identified the greatest risk as maintaining gas supplies through a severe winter.

While the outlook for this winter was said to be "more comfortable" - with National Grid anticipating high capacity and good gas infrastructure - its analysis suggests "that existing regulatory and market arrangements may well be tested severely over the next two decades".

The regulator has raised concerns over how far individual private companies can be relied upon to provide investment to secure future supply against a background of recession, stringent environmental targets and an increasingly complex energy security situation.

Today's report outlines its provisional assessment of supply issues and it is due to make further recommendations - potentially including new ideas on the way the market should be policed in the future - at the end of the year.

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