Longer contracts and higher guaranteed prices for providers could lead to higher bills, think-tank claims
Ministers risk locking households into higher bills for years to come in its race to deliver a clean energy grid by 2030, campaigners have warned.
Ofgem announced that the energy price cap would rise by 2 per cent from 1 October for the average household, despite falling wholesale prices, in a major blow to the Government’s plans to tackle the cost of living crisis.
And campaigners have warned that Energy Secretary Ed Miliband’s push to deliver a near net-zero energy grid by 2030 risked leaving consumers paying higher bills for longer.
Sam Richards, chief executive of Britain Remade, called on the Government to cut planning red tape to speed up the time it takes to build renewable energy projects and new nuclear power plants.
But he added: “The Government risks making renewables more expensive by cramming as many projects as possible into the next renewable energy auction in order to hit its pledge of a clean grid by 2030 at all costs.”
The Government last month prolonged the contracts it is offering renewable energy providers in bid to make building new on and offshore wind and solar schemes more attractive.
Higher prices danger
But Britain Remade – a campaign group for economic growth – said the decision to extend the length of the contracts from 15 to 20 years at a time when the strike (guaranteed) price for renewable energy is so high, meant households were in danger of paying higher prices for longer.
As an example, the current administrative strike price for offshore wind is £113 per megawatt hour (MWh), which is significantly higher than the previous auctions when it was as low as £35 per MWh.
Officials believe, however, that the actual strike price will be significantly lower and the longer contracts will mean costs will be spread over several years meaning bills will be lower for consumers.
Ofgem said that while wholesale energy prices had remained “stable” and had even fallen by 2 per cent over the last three months, the typical household will see their annual bill increase from £1,720 to £1,755 per year.
The rise has been fuelled by a jump in standing charges – what consumers must pay each day to have energy supplied to their homes – which will increase by 4 per cent for electricity and 14 per cent for gas.
Economists warned the unexpected rise could lead to slightly higher than anticipated inflation.
Paul Dales, chief UK economist at Capital Economics said: “We thought that utility prices would be unchanged in October. The 2 per cent rise announced by Ofgem is therefore higher than we expected and adds 0.07 percentage points to inflation in each of the 12 months from October.
“Our forecast is that inflation still rises from 3.8 per cent in July to a peak of 4.1 per cent in September, but the fall thereafter is a bit more gradual.”
Warm homes discount
The regulator said the reason behind the increase in bills was largely down to the wider expansion of the government’s warm homes discount, and the rising cost of paying wind farms to switch off because the grid is unable to move power from remote offshore locations to where it is needed.
Around 2.7 million more low-income households, including 900,000 families with children, are eligible for the £150 discount this winter, after the Government confirmed it would remove the “hard to heat” eligibility criteria.
The Government has said that the change will see an estimated 6.1 million households receive the discount this winter.
Ofgem added that an increase in so-called electricity balancing costs – incurred by network operators to ensure a stable electricity supply for when there is both too much power and too little power in the system – is putting around £1.23 a month to the average household bill.
Britain Remade said that the Government’s failure to adopt zonal energy pricing to counter the shortcomings of the existing energy grid also lay behind the higher prices.
Ned Hammond, deputy director of customer policy at Energy UK, which represents the industry, said the rise was largely down to Government support for the poorest households.
“At a time when customer debt is at a record £4bn plus and many are still struggling with bills hundreds of pounds higher than at the start of 2022, the extra support this will provide is much needed,” Hammond said, before adding: “However, the Government does need to look at a fairer way of targeting support.”
Energy minister Michael Shanks said: “Wholesale gas prices remain 75 per cent above their levels before Russia invaded Ukraine. That is the fossil fuel penalty being paid by families, businesses and our economy.
“That is why the only answer for Britain is this Government’s mission to get us off the rollercoaster of fossil fuel prices and onto clean, homegrown power we control, to bring down bills for good.”