More bad news for energy customers

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February 20, 2013 by Nash Riggins

OFGEM executive Alistair Buchanan has warned energy customers to expect higher household bills as the UK becomes more reliant on energy imports.

Mr Buchanan said in a speech yesterday that government-mandated falls in the UK’s power production capacity will lead to an influx of energy imports – and subsequently, substantially higher bills for customers. At present, OFGEM is already expecting a 10% energy shortfall in capacity by this April.

As a part of Energy Secretary Ed Davey’s vision of the UK’s low-carbon future, vital upgrades to the UK’s power grid mean that several key power stations are being taken offline over the next ten years, and effectively replaced with ‘bigger and better’ ones. These £7.6bn upgrades are being funded largely by consumers, with Mr Davey’s Advisory Committee projecting that the average customer’s bill will rise by £100 per year in order to compensate for the rising cost of energy due to a temporary shortfall.

Now, Mr Buchanan is warning customers that Ed Davey’s £100 will not fully compensate for the UK’s short supply of energy, and that the UK will need more gas supplies in order to fill this impending gap. This is hardly good news for consumers, as the UK already imports a substantial majority of its gas supply. Moreover, it’s hard to gauge exactly why the Energy Secretary didn’t see this coming.

From 2005-2010, the UK’s power regimen changed significantly, with the nation moving from being practically gas self-sufficient to importing 40% of its gas in 2010. By 2011, UK gas imports exceeded production for the first time since 1967, at 60% import.

As the Britain’s rate of energy consumption has risen quite predictably, this rampant increase in imports should largely be attributed to a fall in production of North Sea oil. Consequently, analysts have predicted that the UK could be importing as much as 80% of its natural gas by 2016. Following OFGEM’s voiced concerns over an additional energy shortfall over the next several years, 80% may now turn out to be a rather naïve prediction.

These imports aren’t cheap, either. At present, the UK’s single-largest import partner is Norway; however, UK homes are also powered by natural gas from Nigeria, Algeria, Egypt, Trinidad and Tobago, Libya, Yemen and, until last year, Iran. That being said, the UK spends the most money on natural gas from Qatar, at £4.25bn per year – which is around 70% more than customers pay for Norwegian gas. Within the next 2 years, industry experts predict this figure could more than double.

Unfortunately, UK consumers don’t have too many alternatives where gas imports are concerned. Optimistic estimates indicate that UK reserves of gas currently hover at around 20 trillion cubic feet – which would power the UK for just 2 years at customers’ current rate of consumption.

Meanwhile, evolving methods of extracting shale gas may provide a cheaper alternative to expensive imports in the future, as the most extensive shale gas reserves are found in the US – who would most likely be a substantially cheaper trading partner than Qatar. On the other hand, Britain may not be able to rely too heavily upon US exports, as expensive rates in Asia may prove too tempting for US suppliers to pass up.

Indeed, it’s also worth noting that UK customers already pay up to 53% less for their energy than their European neighbours – which is an impressive feat, given that the UK’s domestic consumption ranks 12th in the world. Subsequently, the issue surrounding fuel prices in Britain becomes not an issue of price, but rather one of affordability. As the nation’s relatively cheap rates continue to slip further out of reach for customers, it is vital that the government pursues viable legislation that can bridge this gap. This does not mean making more attempts to regulate the industry, but making an effort to match this increasing cost of living with higher wages for consumers.

According to the Office for National Statistics (ONS), the UK’s unemployment rate is currently hovering at around 8.1%, and there are over 9m economically inactive citizens nationwide. Meanwhile, pay has risen by just 1.5% since 2011 – whereas in that same period of time, many homeowners have seen their dual fuel energy bills rise in excess of 19%.

Prices are inexorably rising in all sectors – be it the price of natural gas or the price of milk and bread – and unfortunately these increases in living costs cannot readily be avoided. That said, when wages do not fall into line with this natural trend in price increases, numerous hardworking UK homeowners are inevitably bound to fall through the cracks and find themselves suffering under fuel poverty just to make ends meet. The UK government has an undeniable responsibility to its citizens in order to mandate a living wage with which they can live comfortably above the poverty line. Perhaps the time of moaning politicians would be better spent tackling this issue rather than making half-hearted legislative attempts to regulate one of the most competitive energy markets in the world.

In the meantime, we can only hope that Ed Davey’s mid-term energy plan will render a more optimistic market for energy customers beyond 2020 – because it appears OFGEM is indeed correct in its assumption that UK energy prices will increase far more than otherwise anticipated within the next three years. By agreeing to a complete overhaul of the UK’s power infrastructure without fully accounting for its short-term consequences, Mr Davey has opted to gamble away the affordability of British energy – let’s hope he doesn’t lose.

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