Concern over Ofgem's warning of higher energy costs

Consumers will be "alarmed" at Ofgem's warning that they should prepare for higher energy costs after yet another winter of inflation-busting price hikes, a watchdog said.

Ofgem chief executive Alistair Buchanan issued the stark warning to consumers and businesses to prepare for higher prices as power plants close, foreign gas supplies shrink and increasing demand tightens the British energy market.

Writing in the Daily Telegraph, Mr Buchanan said: "We have to face the likelihood that avoiding power shortages will also carry a price.

"If you can imagine a ride on a rollercoaster at a fairground, then this winter we are at the top of the circuit and we head downhill - fast.

"Within three years we will see reserve margin of generation fall from below 14% to below 5%. That is uncomfortably tight."

Compounding factors include expected gas supplies from the Russian Shtokman field being cancelled, China's demand rising by 20% a year and Asian gas costing 60% more than UK supplies.

Which? executive director Richard Lloyd said: "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.

"The Government should ensure consumers are properly protected from unaffordable misery generated by today's broken energy market, and give people confidence that they are not writing the energy industry a blank cheque for years to come.

"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."

Consumer Focus chief executive Mike O'Connor said: "We need to invest but we also need to think about how we protect the most vulnerable consumers who can least afford higher prices.

"In the long term the best hope is more energy efficient homes. We need to do more to ensure our homes do not leak energy and we are calling on Government to use the funds they raise in carbon taxes to insulate our houses to modern standards, saving the poorest in society money on their bills, as well cutting carbon emissions and creating jobs.

"With six million households in fuel poverty, rising to over nine million by 2016, and an increasing proportion of our incomes being spent on essential items likeenergy, this latest news, while not surprising, is chilling."

On the option of shale gas, the Ofgem chief said: "No one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure it comes here."

Mr Buchanan told the BBC: "There is no new nuclear, no new clean coal, no new carbon capture this side of 2020.

"So we will lean on gas, and gas will account for about 60% of our power station needs instead of 30% today, and in order to get hold of that gas we're going to have to go shopping round the world.

"Just at the time we're tight on power stations, the world is going to go tight on LNG (liquefied natural gas) gas prices, so you have got a double squeeze."

Greenpeace energy campaigner Leila Deen said: "Even the Government's own regulator is warning against increasing our reliance on gas and saying fracking the countryside will make little or no difference to bills. Chancellor George Osborne's dash for gas is looking increasingly like the lone sprint of a man wedded to fossil fuels, with the cost to be borne by households and the climate.

"The only path to a stable energy future is for MPs to support a legal commitment to carbon free electricity by 2030 in the Energy Bill."

Friends of the Earth spokesman Guy Shrubsole said: "This is yet another stark warning that UK energy policy is heading in the wrong direction - and the Government's reckless dash for gas will only make matters worse.

"Ministers must urgently tackle rocketing fuel bills by introducing a comprehensive energy-saving programme and ending the nation's reliance on increasingly costly fossil fuels.

"The Energy Bill currently going through Parliament must be amended to include a clean power target to give businesses the confidence to invest in the UK's huge wind, wave and solar resources, create jobs, and provide energy we can all afford."

Mr Buchanan said Ofgem would not let companies take advantage of consumers.

"What I think the consumers are really concerned about is that companies take advantage of rising prices and rising investment periods and line their own pockets," he said.

"We had a major set-to with the industry two years ago.

"I am very encouraged by what the industry is doing - they are paying their fines for behaving badly, they've stopped mis-selling, they are carrying forward a lot of retail market reforms.

"So, for the consumer the issue is 'Are the companies taking advantage of a high-price environment?'.

"And we will ensure they don't do that on behalf of consumers."

The Government said it was acting to prevent any possible "looming energy gap".

A spokesman for the Department of Energy and Climate Change said: "Our energy system faces significant challenges over coming years, including the closure of around one-fifth of our ageing power stations, so, as Ofgem highlights, we cannot afford to be complacent and may face a looming energy gap.

"The reforms we are making to the electricity market through the Energy Bill and through our gas generation strategy are aimed at plugging this gap in order to keep the lights on.

"We have legislated to introduce a capacity market that will help guard against blackouts and ensure there is sufficient supply when margins get tight.

"We are opening up the electricity market to incentivise a record £110 billion of private sector investment in new clean power generation - in renewables, new gas, nuclear and carbon capture and storage.

"We can't put all our eggs in one basket, we need a diverse energy mix.

"This is the best solution to guard against high price of wholesale gas which drives up consumer bills."

Responding to Mr Buchanan's comments, Angela Knight, chief executive of Energy UK, the industry's trade body, said the authorities should "get on with exploring the options for UK shale gas reserves to help energy security and focus on the affordability of energy to households and the competitiveness of British industry".

Opponents of tapping into shale gas reserves claim it causes pollution and earthquakes and does not offer a viable long-term solution to the country's energy needs.

PA