Energy prices are never far away from news headlines these days. Every other week a price increase (or reduction) from one of the utilities or a report published by the government or some independent party brings back the attention to how much energy prices have increased, are increasing or will increase. So it was with the npower report released this month.
For once though we wish this report had received even more attention that it did. In fact, the report is a well-balanced assessment of energy prices in the UK and what factors affect their increase, so much so that the Committee on Climate Change thought it relevant to publish a response to the report.
npower expects the energy bill for an average UK household will increase from £1,247 in 2013 to £1,487 in 2020 (or a rise of 19%), mainly due to rising policy levies and transportation costs. By 2020, cost for power grid upgrades will increase about 72%, adding £114 to the annual bill of a UK customer using 16,500kWh gas and 3,300kWh electricity.
According to npower, this cost largely comes from equipment needed to convey adequate amounts of electricity during daily peaking hours. This is consistent with our view early in the year that the main factor in future price increases will be ‘third party charges’
Their analysis assumes no change in consumption though – and uses today’s consumption to estimate the energy bill. The predicted price increase, in fact, does not include the offsetting potential allowed by smart grid technology, which is that consumers may start generating their own energy and the impacts of lower consumption due to energy efficiency measures.
The main thrust of npower’s argument is that rising costs will largely be beyond suppliers’ control. It may not be surprising that a Big 6 company places blame for the cost increase firmly at the Government’s feet, based on an assumption that energy efficiency policies may not deliver as much reduction in demand as the Government expects.
On the other hand, DECC believes, as stated in the recent EMR delivery plan consultation that consumers bills will actually be lower by 2020 – due to a reduction in consumption.
In the end this is a story of two sides: on one side unit prices of energy, electricity in particular, are undoubtedly due to increase; on the other side, consumption is assumed to decrease as energy efficiency measures take effect.
If we believe that energy efficiency policies such as the Green Deal for example, will really succeed then the DECC scenario is more likely to occur. If we don’t, then the npower view will be closer to reality.
Based on past experience one thing is sure: the increase in energy prices is much more certain than the decrease in energy consumption so on balance the risks to energy bills are on the upside. Who’s to blame depends on your point of view…..
Filippo Gaddo is an independent economic consultant at Future Economics