David Cameron: Country's electricity supply clapped out

David Cameron said today that the country's electricity supply is "clapped out" as the Government unveiled plans to encourage low-carbon energy.

Critics said the plans could add £500 to people's household bills but the Prime Minister said those claims were "nonsense".

Speaking at an energy-efficiency research centre, he said: "The fact is, we've got a very clapped-out electricity generating capacity that is pumping carbon into the atmosphere and we need to replace it.

"Some of the stories today in the newspapers are nonsense about the level of cost.

"What we want is green, reliable, cheap electricity, and we're not leaving that to chance. We're setting out policies today that will deliver that.

"They'll also have the spin-off advantage of helping to make Britain one of the greenest places for green energy, for green electricity, for green investment and crucially for green jobs anywhere in the world."

Energy Secretary Chris Huhne will outline the measures to MPs, which are designed to create "clean" power plants, such as nuclear stations and wind farms.

The consultation is expected to suggest that energy companies should put billions of pounds into low-carbon technology.

Price comparison website uSwitch says funding that investment is likely to cost households at least £500 a year on top of the current total average energy bill of £1,157.

A new tax could be place on fossil fuels such as coal and gas, making them more expensive relative to low-carbon fuel.

Mr Cameron looked at innovative ways in which homes can be more energy efficient at the Building Research Estate in Watford.

He was shown the materials, such as insulation developed by NASA and double-glazed windows, by the centre's CEO Peter Bonfield.

Asked who will eventually pick up the bill for the new plans, he said: "The consumers pay the bills for electricity generation.

"Our electricity generation capacity is clapped out and needs replacing and so that has to be paid for, yes, but if we make sure it is green, safe, reliable and cheap, actually in the long run that will be good for consumers."

The Prime Minister added: "I've been looking round houses here today that actually could see some people's electricity bills come down if we insulate properly and if we build homes that have lower energy requirements."

Chris Huhne also rejected claims that household bills will rocket.

He earlier told BBC Radio 4's Today programme: "The best calculation that we can make is that if you take today's average household bill of about £500, by 2030 we'll be looking at £160 extra on costs.

"But the key point to make is that if we continued with the current patchwork quilt of policies to try to get us energy security and green energy then actually we would be paying more than with the proposals which we are putting forward."

Estimates by regulator Ofgem of a potential 60% rise in bills by 2015 were based on "a forecast, and it's an uncertain world", Mr Huhne said.

"We don't know when exactly the oil is going to start peaking and production is going to start running down," he said.

But it was wrong to put the UK "in hock" to uncertain energy markets, he said.

An Ofgem spokesman said the 60% figure was based on an extreme scenario and that its research suggested an increase of between 14-25% by 2020 was more likely.

"Ofgem's Project Discovery published a range of scenarios in October last year," he said.

"This report to Government showed that bills could rise between 14-25% between 2010-20 to attract the £200 billion Britain needs to deliver secure, sustainable supplies to consumers.

"One scenario which saw a rapid recovery from the recession and less investment in low-carbon generation did see a one-off price spike of 60%."

In a statement to the House of Commons, Mr Huhne set out a four-pronged approach to encouraging investment in low-carbon energy sources, including renewables, nuclear and cleaner fossil fuels.

This will involve:

* Increasing the cost of fossil fuel-based generation by pushing up the carbon price;

* Top-up payments to ensure guaranteed revenues for low-carbon electricity even if the wholesale price falls;

* Additional financial support for the construction of reserve plants to provide a "safety cushion" as Britain increasingly relies on electricity from intermittent sources such as wind and the sun;

* A "back-stop" limit on the amount of carbon which any new coal-fired station may emit.

Launching a consultation on the proposals, Mr Huhne invited comments on the package ahead of a White Paper next spring which will set out reforms to be implemented by 2015.

He acknowledged that reform of the electricity market structure would increase energy bills, but insisted that in the long run it will protect consumers' interests.

"While prices will rise in the medium term, the additional impact of the reform packages will be small, but by 2030 consumer bills will be lower than if we did not reform the market," he said.

He warned MPs that "without action, we will face a real and growing threat to the security of our supply."

Demand for electricity could double by 2050, said Mr Huhne. But a quarter of the UK's power plants need to be replaced over the next 10 years, and EU targets require Britain to increase the proportion of electricity coming from renewable sources from 7% to 30% by 2020.

With the proposed package of reforms, Britain could become "one of the best places to do energy business" in the world, removing the price bias which currently favours fossil-fuel generation and shifting the market's focus permanently towards lower-carbon technologies, said Mr Huhne.

"The case for reform is clear. We need significant investment in our energy infrastructure," he said.

"As old coal and nuclear plants shut down and demand for electricity grows, we must build the next generation of power stations. The electricity they deliver must be both affordable and sustainable, helping us to meet our emissions reduction targets - and keep the lights on."

And he added: "We have a once-in-a-generation chance to rebuild our energy market, rebuild investor confidence and rebuild our power stations.

"Like privatisation before it, this will be a seismic shift, securing investment in cleaner, greener power. And delivering secure, affordable and low-carbon energy for decades to come."

Shadow energy and climate change secretary Meg Hillier said: "The Tory-Lib Dem Government has a once-in-a-generation opportunity to get market reform right. Future green energy and the security of supply for customers depends on it.

"At a time of rising fuel prices, the Government must make sure these reforms do not hit hard-pressed consumers' pockets first."

Ofgem chief executive Alistair Buchanan described the consultation as "an important step on the road to changing the electricity market to meet consumers' long-term interests for reliable and low carbon energy supplies".

Mr Buchanan added: "By starting the reform process promptly the Government is focused on keeping investment costs and energy prices as low as possible for consumers.

"Given the Government's projection of higher electricity prices, it is vital that consumers can have confidence that prices in the retail market are providing them with value for money. This is why Ofgem launched its current retail market inquiry."

Audrey Gallacher, head of energy at the Consumer Focus watchdog, said: "Cutting our carbon emissions and improving our energy supply is clearly essential but will come with a big price tag. Consumers can't be expected to write a blank cheque to fund this.

"There must be some restraints on the level of cost that will be passed to energy customers. A balance must be found on how this is funded between Government, energy customers and the industry.

"Improved energy efficiency measures are also needed to help mitigate rising prices, particularly to help the poorest customers who will be hardest hit by increased costs."'

Steve Radley, director of policy at the Engineering Employers Federation, said: "Today's reforms are likely to prove counter-productive. On the one hand Government has provided a more predictable and cost-effective approach to energy policy which should benefit both investors and consumers.

"It has also fired the starting gun for a policy that will prove the right market signal for investment in low carbon power generation to provide long term energy security.

"However, these reforms come at a significant price for UK manufacturers, including those who want to invest in low carbon technologies. The Government's own impact assessment shows the carbon price reforms will damage competitiveness for over a decade but it offers no solutions that will mitigate this."

Dr Douglas Parr, policy director at Greenpeace, said: "Business as usual in the energy market would see future bill payers massively exposed to changes in international gas prices - an option that only an ostrich would see as sensible. The costs of correcting this market failure are dwarfed by the potential risks of inaction.

"The reforms, if done right, could make funding renewable energy and efficiency more attractive. But as well as boosting investment in new energy we also need to stop propping up the old. Weak regulations on polluting power stations and subsidy crutches for nuclear are just obstacles in the way of the UK's clean energy future."

Dr Paul Golby, chief executive of E.ON, said: "Investing billions of pounds in cleaner technologies will cost money, which all of us will pay for through our bills. We will do what we can to mitigate this but the fact that bills will rise as we look to clean up the UK's energy system has to be acknowledged."

Sue Ferns, of the Prospect trade union, said: "The Conservatives made a lot of noise before the election about setting up a green investment bank but the coalition has backtracked, instead opting for a fund that could evolve into a bank.

"The spending review provided for £1 billion of capitalisation by 2013. Analysts have argued that to make a significant impact, the green bank would need £6 billion, and needs to be established as a genuinely independent bank.

"This is crucial because without effective measures for stimulating green investment we will not achieve the necessary policy change to deliver the emissions reductions that will curtail dangerous climate change.

EDF Energy chief executive Vincent de Rivaz said: "This is a landmark day. The announcement reflects a broad consensus that a robust carbon price and other market reforms are in the interests of consumers and the environment, minimising the costs of meeting climate change and security of supply targets.

"It creates a momentum that triggers the path to implementation in 2011."