Energy Prices in need of reform by Chris Huhne

Energy prices: without reform, we’ll all be in the dark

By Chris Huhne (the article first appeared in the Daily Telegraph on 11th July 2011)

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.

Chris Huhne is Energy and Climate Change Secretary

Rising Energy Prices and the UK's Energy Landscape

Rising Energy Prices and the UK's Energy Landscape

By Roger Harrabin, BBC Environment Analyst.

 

How will poor people cope with energy bills as the UK strives to meet its EU target of 15% of energy from renewable sources by 2020? It's a question that's been raised by the CEO of Centrica, various economists and anti-green campaigners. And it'll doubtless be asked when the government shortly unveils its Energy White Paper.

But it's not quite the right question - for three reasons.

First because UK energy costs will go up anyway as we replace our ageing fossil fuel power fleet. It is yet another example of how we've been free-loading off the capital investments made unwittingly by our parents and grandparents - and now we have to fork out. This is clearly a problem as uSwitch note that 25% of people already have difficulty paying power bills already.

The second reason why the question is wrong is because no one I know outside government expects the UK to meet the renewables target anyway. My view is that ministers are keeping the target in place because if they drop it the schedule will fall even further behind.

The third reason is that energy prices are based on a complicated mix of factors.

Although an over-hasty rush for renewables will definitely land people with large bills, most analysts seem to agree that a good proportion of renewables in the mix is helpful in the long term. That is because it buffers households against the sort of prices spikes we would likely see if we were over-reliant on gas, which is subject to shocks as diverse as the Middle East Spring and the Fukushima nuclear crisis.

In this way renewable power can be seen as something like a fixed rate mortgage in which you maybe pay more, but you know that you can budget for it on a monthly basis.So, what are the implications for prices in 2020? It's a question I emailed to 30 experts. Perhaps not surprisingly I got very few replies. Most weren't willing to speculate.

Take this response from the veteran energy analyst Walt Patterson: "Everyone will be guessing (about future prices) and their guesses will depend on what they think policy should be. The legendary head of the Irish Electricity Supply Board, Patrick Moriarty, used to say: 'The price of electricity is what the government wants it to be'. That's still true."

But official bodies have to produce numbers - so some figures are available. The Climate Change Committee estimates that bills in 2020 may rise about 25%. The regulator Ofgem has a wide range of figures, largely dependent on the price of gas, stretching from 14% to 52%.

Sam Laidlaw, who runs the energy giant Centrica (which runs British Gas), told the Economist Energy Summit recently that his polling showed consumers weren't willing to face a 50% rise in bills - they would rather risk the lights going off.

It would be a brave government that tested the resolution of the public on future blackouts - especially as we are so plugged into our TVs and computers.But Ofgem tell me that Sam Laidlaw's analysis is somewhat misleading anyway as their 52% top end prediction was only in the case of a sudden price spike - they didn't expect it to continue for any length of time.

But whatever the price rise, it is clear that the government faces continuing controversy over bills, especially if - as widely predicted - its Green Deal for some insulation proves less successful than hoped.The Consumers Association, the charity trading as Which?, will soon be starting a campaign on energy. I'd been told it was a campaign against higher prices but it's more subtle than that. Louise Strong from the association said they wanted to engage the public in more of an open dialogue.

People, she said, wanted to keep the lights on and have low bills, but people were also resisting onshore windmills which would bring them relatively cheap energy. This, Which? says, is a long-term conversation.
In the short-term, it says, there must be more emphasis on helping the growing ranks of fuel poor and they hope the Electricity Market Reform White Paper will take steps in this direction.

The White Paper certainly has many roles to play, including underpinning the government's low-carbon goals with clear signals to the renewable power investors, and to the nuclear industry. It's all a very big ask - and perhaps hardly surprising that most of the experts I've spoken to about the proposed legislation don't have very high hopes.