Ofgem predicts energy price hike

2 min read

The UK may need to invest up to £200bn to secure energy supplies and meet environmental targets, according to energy watchdog Ofgem.

In a report reviewing Britain’s energy markets, the regulator said that consumers may face steep energy price rises as gas and electricity supplies become increasingly unstable due to volatility in the global gas market and power stations approaching end of life.

The group outlined four potential scenarios to assess the energy risk to the UK in the next 10 to 15 years. It forecasts that if global businesses experience a strong recovery whilst missing carbon-reduction targets, energy prices could increase by more than 60 per cent by 2016.

The scenario with the smallest price increase sees energy bills rise 14 per cent by 2020 following the execution of green initiatives and a slow economic recovery.

However, Ofgem argued that if gas and electricity prices remain low in the short term then incentives to invest in renewables and nuclear will be reduced.

As a result, it claimed the UK will rely increasingly on gas from volatile global markets, causing a 22 per cent increase in energy prices by 2020.

A further scenario predicts consumer bills to rise by 23 per cent by 2020 if carbon-reduction measures are combined with strong economic resurgence. In this scenario, the report predicts that the UK’s demand for electricity will spike as a result of increasing reliance on technologies such as electric vehicles.

Paul Ekins, co-director for Energy Systems at UK Energy Research Centre (UKERC), has welcomed the focus on green technology investment but believes that Ofgem has not gone far enough in addressing the likely price rises.

‘The good thing about this report is that it is beginning to talk realistically about price rises,' he said. ‘In the extreme case, it predicts a 60 per cent increase, but I believe that’s only the minimum type of energy price rise we are going to deal with. I wouldn’t be surprised if by 2020 prices had doubled in real terms.’

According to some energy utility companies, a key factor in keeping these prices affordable will be the timescales involved in rolling out green technologies.

In response to the report, energy supplier EDF has urged the government to review planning restrictions that could stall the development of its four new nuclear reactors in the UK.

Vincent de Rivaz, EDF’s chief executive, said: ‘Ofgem’s scenarios demonstrate that delays in the planning process now could deter investment in low-carbon generation and further increase dependence on carbon-emitting fossil fuels.

‘In addition, the carbon market needs to be further developed to provide sufficient clarity to assess large long-term capital investments. On this, UK-specific action is needed to reinforce the operation of the EU-ETS in the UK, which could be through a UK carbon price floor, which is not a subsidy but a cost payable by carbon emitters.’

However, the British Wind Energy Association (BWEA) claims that the government’s focus should be diverted from CCS and nuclear as these technologies, it claims, will not be available in quantity within the timescales required. Instead, it argues that investment in wind, wave and tidal energy will be the only way to keep prices affordable.

Maria McCaffery, BWEA chief executive, said: ‘Wind, wave and tidal energy can deliver both energy security and price stability. Putting our faith into fossil fuels could irreparably damage the environment and still not save us any money. This study clearly shows that we must back the Renewable Energy Strategy and deliver nationally on our share of the pan-European carbon-reduction targets.’

Ekins believes that while the UK is agreed on investment in green technologies, the industry must unify on a strategy to deliver carbon-reduction technologies. He claims that discussions on which technologies to focus on have up until now been counterproductive.

‘What we really need is a decent response to climate change globally. This will solve number of different problems, especially security of supply challenges. Getting the investment isn’t really going to be a pressing issue in my opinion, but developing a unified carbon-reduction strategy will be crucial if we are to avoid the two non-green scenarios.’

Ellie Zolfagharifard