Energy prices: without reform, we’ll all be in the dark
It is vital that Britain prepares to provide far more of its own energy needs
There is, as the managing director of Centrica said last week, “never a good time to raise prices”. Last week, the UK’s biggest energy company raised its gas prices by 18 per cent, and its electricity prices by 16 per cent. Centrica were following hot on the heels of Scottish Power with similar increases.
Winter may seem a long way off, but consumers are already feeling the chill as food and fuel prices erode household spending power. With 99 per cent of Britain’s energy supplied by just six companies, do not expect to find an easy escape.
Clearly, we must act. The first step is to understand the problem. Price hikes do not happen in a vacuum. They are symptomatic of fundamental ills in our energy system. Left untreated, they will return to damage our economy again and again.
Our fossil fuel habit leaves us hostage to global energy markets. The days of North Sea self-sufficiency are long gone. Today, we rely on imported fossil fuels to provide a third of our energy; in less than 15 years, it will be half.
This would not matter so much if we had a balanced energy portfolio where nuclear and renewables smoothed out volatile gas prices. But we are 25th out of 27 European countries for renewables, and have not built a nuclear power station since 1987.
Most of our electricity comes from gas-fired power stations, and 60 per cent of the world’s proven gas reserves are in Russia and the Middle East. Domestic bills track global prices. When wholesale gas prices rise, so does the cost of living in Britain.
Our ageing power stations also need replacing. Demand for electricity could double by 2050, as we opt for electric vehicles and heating. If we do not do something now, supply will not keep up and the lights will go out.
A quarter of Britain’s capacity will need replacing before the decade is out, as old coal and nuclear plants come to the end of their useful lives. It would not be safe, efficient or legal to prolong them.
Ofgem estimates that we need £110 billion of electricity investment by 2020. That is £30 million a day for 10 years - double the investment rate of the previous decade. It is the equivalent of 20 new power stations, together with the infrastructure to connect them to the grid.
This money has to come from somewhere. Not even the big six energy suppliers are big enough for the challenge. We need new blood in the electricity market. But businesses are not charities; they will not invest without a realistic expectation of return.
Inevitably, that will mean higher bills. If we were to leave the market as it is today, annual household electricity bills would rise by about the same amount as last week’s increase - about £200 higher by 2030.
What can be done? In the short run, we want consumers to take control. Energy companies must at present give consumers 30 days’ notice of price rises - rather than waiting more than two months before informing consumers that they are paying more for their energy. Ofgem calculates that consumers can save up to £200 a year by shopping around for the best deal. And just last month, I wrote to energy companies to ask them to provide better billing, letting customers compare their energy use - and the savings if they switched to cheaper tariffs.
For the most vulnerable consumers, such as the poorest pensioners, we are giving extra help. Our social discounts increase by 67 per cent compared with Labour. Nearly a million pensioners will benefit by £120 a year.
But we must also address the underlying problems of fossil fuel addiction and chronic dithering over investment. That is why the Coalition will today set out the most significant reform of our electricity market for 30 years. It will deliver secure, affordable energy for generations to come.
First, we will ensure the security of our energy supply by changing the way we contract for our back-up electricity. A “capacity mechanism” will make certain that when the nation’s kettles flick on at half-time, the system can cope.
Second, Chancellor George Osborne sent a clear message in the Budget that we should rely on clean electricity in future. His new carbon price floor will put a fairer price on carbon emissions and reinforce the underperforming EU scheme. This reduces uncertainty for investors, and provides an incentive to invest in low-carbon generation now.
Third, we will introduce a new system of long-term contracts to remove uncertainty and make low-carbon energy more attractive. Companies will be attracted to build new plants in our market because they will be able to plan for the price they will receive. Under our preferred option, if the market price is too low, they will get a top-up. But the good news for consumers is that if prices go sky-high, companies will pay back the difference.
Fourth, we will set a limit - an Emissions Performance Standard - on the pollution of carbon from new fossil-fuel power stations. This means that no new coal power can be built without a system to capture and store its carbon, but it will encourage new gas plants to keep the lights on in the short term.
Together, these reforms will secure our energy future. They will get us off the fossil fuel hook and on to clean, green and secure energy. Crucially, they will keep bills lower than they would be if we stuck with the existing arrangements.
The Rt Hon Chris Huhne MP is Energy and Climate Change Secretary
The Telegraph 12 July 2011