£2,000 annual fuel bills loom to fund new power stations

Government accused of making households pay for its failure to invest in energy system

Fuel bills may rise to almost £2,000 a year to pay for new power stations, householders were warned yesterday.

Regulator Ofgem said that bills would have to rise by between 14 and 60 per cent over the next 10 years to fund up to £200bn of new investment.

Consumer groups warned that millions more pensioners and other vulnerable groups would struggle to afford the increases. Opposition politicians and energy analysts combined to complain that future bill-payers were paying the price for years of underinvestment in Britain's energy system.

The forecasts come days after The Independent launched a campaign criticising the Big Six suppliers for failing to cut gas and electricity bills. Readers are advised to save money by switching to cheap internet tariffs.

Publishing its Project Discovery report, Ofgem said that how much bills rise by will vary depending on the global economic recovery from recession and methods of generating new power. It set out four scenarios that would cut greenhouse gas emissions by between 12 and 43 per cent from 2005 levels. Investment would range from £95bn to £200bn.

With a slow recovery, low global demand for energy and high investment in renewables, nuclear and carbon capture, household bills would only rise 14 per cent by 2020.

If growth is slow but few nuclear and renewable power plants are built, pricey imported gas will require a 22 per cent rise in bills over the same period.

If, on the other hand, the global recovery and investment in green measures are strong, bills will rise by 23 per cent.

In the most expensive scenario, a strong economic recovery with few green measures and no new nuclear power stations by 2020, competition would intensify for gas supplies. In that case, domestic bills would soar by 60 per cent to a peak of £1,972 a year in 2016, before falling.

"Our scenarios suggest that Britain faces a tough challenge in maintaining secure supplies while at the same time meeting its climate change targets. However, there is still time to act," said Ofgem chief executive Alistair Buchanan.

Association of Electricity Producers chief executive David Porter warned that investment in the energy sector could not be done "on the cheap", adding: "In the end, the customer does pay."

Shadow Energy and Climate Change Secretary Greg Clark said the report showed the current system had failed. His party has promised to refer the Big Six suppliers to the Competition Commission for an investigation into pricing. "Britain's energy policy is as much a horror show as the public finances," Mr Clark said.

"As we have repeatedly warned, after 12 years of the Government having its head in the sand, consumers face a combination of power cuts and high bills."

The Institution of Civil Engineers pointed out it had been calling for extensive investment in the ageing power network since 2003.

Consumer groups expressed concern about the impact of the rises. "These scenarios range from the bleak to the stuff of nightmares," said Robert Hammond, of Consumer Focus, which says current average bills of £1,239 a year are £96 too high.

He added: "Energy pricing has been an art in obfuscation for some time. The complexity of commodity costs, generation investments and climate change targets have been used to justify punitive consumer bills.

"We need a strategy that pours forensic scrutiny on energy pricing."

Which? energy campaigner, Fiona Cochrane, said: "We can't allow a situation where we have to choose between paying a king's ransom for our energy or face the lights going out.

"The way consecutive governments have passed the buck on this issue is tantamount to negligence. By ignoring security of supply for so long, they've saddled consumers with what could be a colossal bill."

The future: How energy bills could rise

1. Green Transition In this scenario there is a rapid economic recovery and a significant expansion in investment in green measures. Domestic renewables targets are met and energy efficiency measures are effective. British demand for gas falls, but electricity demand increases due to greater use of electric vehicles and heat pumps. The effect on domestic consumer bills is an increase of 23% by 2020.

2. Green Stimulus There is a slow recovery from the recession and restricted availability of finance. Governments around the world implement green stimulus packages to achieve environmental goals and boost economic activity. High carbon prices and government policies support investment in renewables, nuclear and carbon capture and storage. The effect on domestic consumer bills is an increase of 14% by 2020.

3. Dash for Energy Global economies bounce back strongly but security of supply concerns prevail over meeting environmental targets. Competition between countries for energy resources results in tight gas supplies and high fuel prices. Supply chain and planning constraints prevent new nuclear plants from becoming operational before 2020. The effect on domestic consumer bills is an increase of more than 60% by 2016 before falling back.

4. Slow Growth The recession continues resulting in investment in gas and electricity infrastructure being considerably lower than before the credit crunch. Low gas and electricity prices reduce incentives to build nuclear and renewable power plants. This results in an increasing dependence on imported gas for new gas-fired power stations. The effect on domestic consumer bills is low in early years but an increase of 22% by 2020 as conditions tighten.