Households are to face much higher energy bills for years to come, owing to over-reliance in the UK on imported gas, the head of Ofgem warned on Tuesday.
Alistair Buchanan, chief executive of the energy regulator, said that ageing power stations were being taken out of service faster than expected, causing a “tight situation” with electricity supplies.
Gas prices are still rising across most of the world, as demand from Asia continues to soar. The UK’s North Sea reserves are rapidly dwindling, exposing consumers to higher prices.
According to Ofgem, the average duel fuel bill in the UK is £1,420 a year, an increase of 18% since 2009.
But the UK’s reliance on gas is set to intensify. Building more gas-fired power stations is the government’s favoured way of filling the electricity generation gap as coal, oil-fired and nuclear power plants are retired.
According to Ofgem, gas is likely to account for 60% to 70% of power generation by the end of this decade, compared with the current level of about 33%.
Consumer groups and green campaigners have called on ministers to take measures to protect households and diversify the energy supply.
Richard Lloyd, executive director of Which?, warned that the UK’s energy market was “broken”, because of too little competition among the big six suppliers. He said the government should not be writing a blank cheque to the industry.
Lloyd added: “Consumers will be alarmed at Ofgem’s prediction that they will pay an even higher price for our increasing reliance on imported gas. After another winter of inflation-busting price hikes, the rising cost of energy is already one of the top financial concerns for hard-pressed households … We want ministers to do more to help people improve their home energy efficiency, to make the energy market more competitive and to guarantee every consumer gets the cheapest possible deal.”
Buchanan said reserve margins for generation capacity were set to fall from 14% to just 5% within three years, though he played down the threat of power cuts to consumers: households are less likely to be affected by capacity shortages than energy-intensive businesses, many of which have contracts that stipulate their supply can be cut at times of peak demand to free up generating capacity elsewhere.
Ofgem’s analysis follows repeated warnings from the Committee on Climate Change, the statutory body established to advise ministers on how to meet the UK’s carbon targets, that rising gas prices would hurt the UK.
The CCC has suggested that diversifying the UK’s energy mix, rather than increasing the focus on gas, could help lessen the impact of the higher bills.
Buchanan’s warnings are a challenge to the chancellor, George Osborne, who has promoted a “dash for gas” as the way of keeping the lights on and keeping energy bills low for consumers and businesses.
The Treasury has also attacked subsidies for renewable energy, which energy experts and green campaigners maintain would provide a lower-cost alternative to the overweening dependence on fossil fuel.
The Treasury is understood to be predicting lower gas prices, owing to increasing supplies globally, arising from shale gas. But this analysis is at odds with that of the International Energy Agency, the gold standard for energy and emissions research, which notes that the low price of gas in the US – about a unit, compared with about five times as much in Europe – will not translate into lower global prices for many years.
The shale gas supply is being soaked up by demand within the US, where it is displacing coal for power generation, and the excess coal, a high-carbon fuel, is being exported to international markets instead.
Shale gas will not make any big impact on prices in the UK, says Buchanan. Shale reserves here are likely to be much smaller than those in the US and harder to exploit.
In the UK there are about 6m households in fuel poverty, which is set to rise to 9m by 2016, though the government is likely to alter the definition to reduce the headline numbers.
Mike O’Connor, chief executive of Consumer Focus, who said ministers should find ways to protect poorer households, questioned the mechanism governing the cost of investment.
O’Connor said: “The trend is for bill payers, rather than taxpayers or shareholders, to take the burden and risk. We must question whether that is right … As always, those who can least afford to pay will suffer the most. Millions of homes face their own security of supply crisis every day, and many have to respond by staying cold.”
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