Was it just me who got angry when they read the ‘shock’ news last week that British Gas was putting up prices again?
And it wasn’t anger about the news per se but more that the focus of the story again pointed to profiteering from energy suppliers.
Don’t get me wrong, I absolutely believe that suppliers should be held to account on energy prices but what is being missed by the media is the real story that is causing the majority of the price increases. Throwing mud at suppliers and/or government will not solve the real issue – we need to look closer to home for that.
The real story is that consumers’ bills are going up and will continue to do so for several years so let’s stop being surprised every time that happens. The reason they are going up is to secure the UK’s ability to generate its electricity needs in decades to come. We may not like it but the story for business and consumers is the same.
Supplier bashing is easy – but look at the facts
To avoid rising energy costs the only real solution is to seriously start looking at how we manage and reduce consumption and even what potential there is to take control of our ability to generate our own. Supplier and government bashing is a good sport – but ultimately the power (no pun intended) sits closer to home.
There are a few facts that UK consumers need to have at the front of their minds:
The majority of our electricity has historically been generated by large coal-fired generation stations. These are reaching the end of their useful life and a good percentage of them have to close due to age, carbon emissions or a mixture of both. As a country, we therefore urgently need to replace electricity generation capacity if the lights are to stay on.
The network of pylons and wires that crisscross the country were built a long time ago, transporting electricity from the large scale generation stations into our businesses and homes. The infrastructure is old and has lacked material investment for many years – with a focus on ‘maintenance’ rather than upgrade. As we cannot store electricity on a large scale basis, we need a materially improved infrastructure of wires to transport electricity from wherever it is generated in the future to its final destination.
The Government estimates the cost of addressing the infrastructure is approximately £200 billion by 2020 but many analysts predict it will cost significantly more than that. The existing ‘Big Six’ suppliers do not have the strength of balance sheets to support this level of investment in new generation. Therefore money needs to be attracted from other sources to help fund the investment. The Government has developed a raft of incentives (eg Feed in Tariffs, Capacity Mechanism, Renewable Heat Incentive) to make the UK an attractive place to invest.
Yes, we’re paying – but to get wired
Consumers, whether business or domestic, effectively fund investment in the national ‘wires’ infrastructure via our bills. We also, through convoluted means fund the cost of the incentives to attract new investment. These are the costs that have been driving the majority of price rises to date. Already, almost half our electricity bills relate to these costs rather than the cost of the energy itself. Going forward, they will continue to rise but it is also expected that the raw cost of electricity will increase and get more volatile as total generation capacity gets squeezed and the laws of supply and demand get stress tested.
So it’s not so much the suppliers who are driving price rises as the Government and Ofgem, which between them are responsible for setting the mechanisms and levels for investment in the ‘wires’ and new incentive schemes.
Should the media start hounding the Government on rising prices? Probably not.
There is astonishing political consensus on the overall direction of the new Energy Bill which formalises many of these plans. Only eight people across all Houses voted against the Bill in its latest round through Parliament. The reason why, is simple.
Whilst there’s lots of debate and disagreements around the edges, the need to secure the UK’s energy needs in the future ultimately overrides all differences. This includes the impact that it has on consumers’ bills.
Jo Butlin is the Managing Director at Utilyx.