Wholesale energy and the network grid: the parts of our energy bill politicians can’t control?
Energy minister Ed Davey says it’s “impossible” for politicians to stop consumer energy bills going up because more than half of the costs are beyond his control. Is he right?
Media commentary has focused largely on the role of government levies intended to support renewable power and increase energy efficiency in driving up energy bills. But in an interview on the front page of today’s Times, Davey argues the rising wholesale cost of energy and increased network charges mean “energy bills will continue to soar”, whatever decisions ministers make.
Wholesale energy costs
The wholesale cost of electricity and gas accounts is the biggest component of the prices customers pay for their energy – making up around half of the average bill, according to energy regulator Ofgem:
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Source: Ofgem, October 2013
Over the last ten years, wholesale electricity costs as a whole have risen by around 140 per cent. And this is showing up on bills. Changes in wholesale costs accounted for at least 60 per cent of the rise in household energy bills between 2010 and 2012, The Department for Energy and Climate Change (DECC) estimates.
The price of gas
The price of gas has played a particularly important role in this trend. The cost of gas has risen by 240 per cent over the last ten years, according to Ofgem, acting as the main driver of rising energy bills.
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Source: DECC, Estimated impacts of climate and energy policies on energy prices and bills, November 2012
The discovery of natural gas in the North Sea in the 1980s meant the UK enjoyed a period of low gas prices up until the early 2000s. But as the North Sea gas supplies started to run out, the country has become increasingly reliant on imported gas – and prices have risen sharply.
Gas prices going up
Becoming more dependent on gas imports means the country is vulnerable to the effects of international events. In 2011, for example, the Arab Spring pushed up the price of oil – meaning gas got more expensive. The same year, the Fukushima nuclear disaster saw a spike in gas demand, which also pushed up prices.
This makes it difficult to predict what’s going to happen to gas prices in the future and not everyone agrees. But the government, National Grid and energy consultancy Poyry predict they are likely to increase:
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Source: Navigant’s report for DECC on future gas prices
Some commentators argue the experts are wrong, and gas prices will go down in the future despite their predictions. Overall, it’s not surprising there’s disagreement, as predicting future gas prices is a notoriously difficult exercise.
Is there anything that could counteract the uncertainty? Creating a UK shale gas industry has been touted in the media as a silver bullet for rising energy prices. And a few reports suggest that indigenously produced shale gas could help bring prices down in the UK. But this only works under the most optimistic scenarios. Most reports indicate that UK shale gas will not bring gas prices down in this country for at least 10 years.
Price of upgrading the grid
Gas prices aren’t the only factor beyond government’s control, Davey argues. The need to replace ageing power networks is also responsible for driving up bills, he says.
The UK’s power grid urgently needs an upgrade, and this is proving expensive. Energy company SSE said last week that the costs of using the energy networks are ten per cent higher this year than they were a year ago as Ofgem funds much-needed work.
The government estimates that overall, £110 billion of investment will be needed in new energy infrastructure by 2020 – which also seems likely to end up on consumer bills. DECC breaks this down into £75 billion for constructing new generation capacity and £35 billion for upgrading the network grid.
Is this cost beyond the government’s control? One of DECC’ senior civil servants suggested last year that ” a large part” of the £75 billion would go to pay for low-carbon generation as a result of government policy. The need to connect new low-carbon generating capacity also accounts for some of the cost of upgrading the grid. But even without the shift to greener technologies, companies would need to pay out some money to spruce up the country’s energy infrastructure.
Costs – controlled and uncontrolled
It’s hardly surprising that the wholesale costs of energy makes up a significant chunk of consumer energy bills – and Davey is right that there’s not much the government can do to influence the changing costs of fossil fuels traded on international markets.
On the other hand, while the UK power system is due an upgrade, the government has made a political choice to create a low-carbon energy system from one that is largely dependent on fossil fuels. The costs of that shift fall on consumer bills via government subsidies and increased network costs. But ultimately it should also reduce the country’s reliance on fossil fuels – driving down the wholesale costs of energy.
So the picture isn’t simple. But while media commentary largely focuses on the cost of ‘green’ measures, it’s clear that Davey’s right – at least in the short term a good chunk of consumer bills are beyond political control, and it doesn’t make a lot of sense to pretend they aren’t.