CHRIS Huhne, the energy secretary, is set to reveal the most radical reforms of Britain’s electricity market for two decades, in a move that will see household bills further increased in the coming years.
The government will publish a white paper tomorrow designed to give utility companies the £110bn financial incentives needed to invest in renewing the UK’s energy infrastructure and reduce greenhouse gas emissions.
The reforms could see household electricity bills rise 30 per cent from £500 to £650 in the next twenty years, according to the Department of Energy and Climate Change (DECC).
The move comes after Britain’s largest energy supplier British Gas said it would raise domestic tariffs for gas and electricity by 18 and 16 per cent next month, an increase which will affect 9m energy users.
Analysts expect other retailers to announce a hike in prices by the end of the month following steep rises in wholesale costs and a higher global demand for oil and gas.
Among the proposals, the government will introduce a system called “contracts for difference” (CFD) whereby energy companies such as Centrica and EDF are guaranteed a fixed income for electricity generated from nuclear power and wind farms.
The CFD would provide energy firms with a guarantee of stable electricity prices in return for building the country’s new nuclear plants.
The current electricity price is around £60 per megawatt hour, however the price would need to reach between £90-£100 per megawatt hour for energy companies to think nuclear power worth the investment.
Huhne will also confirm a subsidy called “capacity payments” for operators of gas-fired plants, who would provide electricity in case of shortfalls from renewable sources such as wind.
Details of how much in capacity payments operators will receive will not be revealed in the white paper and a further consultation period is expected to take place.
Huhne has argued that without investment in renewables and new nuclear power, emissions will remain too high: “We will become dependent on energy imports, and increasingly vulnerable to fossil fuel price volatility,” he said.
“More than £110bn of investment is needed in new power stations and grid upgrades over the next decade, that’s double the rate of the last ten years. Put simply, the current market is not fit to deliver this.”
Some experts, however, have said that the reforms would mean UK electricity prices becoming amongst the highest in Europe. A report commissioned by Which? from the Energy Policy Research Group estimates that while UK electricity and gas are less taxed than other countries in the European Union, a 47 per cent increase in electricity unit costs would send UK electricity prices towards being the highest.
Huhne rubbished the claims yesterday in an interview on the BBC’s Andrew Marr show, indicating that in the long-term reforms will lead to the UK having some of the lowest bills in Europe.
The government faces pressure to meet the EU renewables energy target of 30 per cent by 2020, up from seven per cent today.
Electricity up 17 %
Centrica, the owner of British Gas, said it will increase domestic gas and electricity prices in August, following increases in wholesale gas cost and rising global demand in oil and gas. The largest energy supplier in the UK said on Friday it would raise tariffs for gas and electricity by an average of 18 and 16 per cent respectively on 18 August 2011. “Today’s announcement follows steep rises in wholesale costs, which have increased 30 per cent since last winter because of higher global demand for gas," Centrica said. The latest price hike will push thousands more households into fuel poverty, the watchdog Consumer Focus said.
Gas up 19 %
Scottish Power announced last month that gas bills will increase by an average of 19 per cent from August 1, while electricity bills will be 10 per cent more expensive. The rise will affect 2.4m British households. Analysts said the group had been under pressure to raise prices sooner than its competitors, as it had increased prices by less than its peers last winter. "Prices for gas and electricity have increased significantly since the end of last year and continuing unrest in global energy markets means future prices are volatile," said UK director Raymond Jack. He also cited the government’s environment programmes as a reason for the rise.