The recent round of price hikes will not be the last. Household power bills are set to rise significantly this decade due to increases in wholesale power prices and low-carbon policies.

London, 18 December 2012 – This week, E.ON was the last of the UK’s ‘Big Six’ energy supply companies to increase its gas and electricity prices for household consumers. Analysis published today by Bloomberg New Energy Finance concludes that British consumers should prepare for further increases in the years ahead.

The UK government published its Energy Bill in Parliament on 29 November, part of the most substantial overhaul of the British power market in over a decade. Its electricity market reforms seek to drive large-scale investment in low-carbon generation, while minimising the cost to consumers. The government has also stated its intention to support the construction of gas-based power stations, and the resumption of development of the UK’s shale gas resources.

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The paper, entitled “Unwrapping British energy bills to 2020”, written by the company’s European Power Market Insight team, shows domestic electricity bills rising by an average of 54% through to 2020.

This would be sufficient to take the average household bill from £454 now to £699 at the end of the decade – assuming consumption remains constant, and using commodity forward curves in which NBP gas reaches 74 pence/therm ($12/MMBtu) in 2020. Bloomberg New Energy Finance’s forecast for bills in 2020 is about 15% lower than that published by the UK Climate Change Committee this week[1].

Electricity bills for UK consumers have risen more than 70% since 2005, largely due to increases in the cost of gas and coal feedstock for fossil-fuel generation. Bloomberg New Energy Finance’s analysis shows that for the next seven years, the main drivers of increasing prices are likely to be increasing wholesale energy costs as gas-fired electricity displaces coal, the introduction of a “carbon price floor” and the rising subsidy bill as renewable energy volumes increase.

Bloomberg New Energy Finance’s analysis shows that low-carbon policies – including the introduction of a carbon price floor from April 2013 and renewable energy subsidies – will account for 40% of the expected increases in household power bills between now and 2020.

Almost as significant in driving up the price, however, will be wholesale power prices. These will contribute 28% to the increase in consumer electricity bills, driven by rising commodity prices and a shift in the generation mix as ageing coal-fired power stations are retired, largely in favour of gas-fired plant.

The remaining 32% of the price increases are driven by the costs of network improvements and the multiplier effect of VAT and company margins.

Despite the current excitement about shale gas extraction on both sides of the Atlantic, Bloomberg New Energy Finance does not believe it will drive a significant fall in the cost of gas in the UK between 2012 and 2020. Increases in both conventional and unconventional production elsewhere in the world will have a more muted effect on UK gas prices, given the steep declines in UK continental shelf production.

Fraser Johnston, power analyst at Bloomberg New Energy Finance, commented: “Given current gas price trends, our analysis suggests that low-carbon policies will be the biggest single factor driving up electricity prices through to 2020. Currently they account for less than 10% of a typical household electricity bill; by 2020, this will be 21%.”

Mike Lawn, head of power research at Bloomberg New Energy Finance, said: “These electricity price increases will reflect the fact that the UK is transforming its mix of generation, pushing renewables close to 30% by 2020, largely at the expense of coal, and with a greater dependence on rising gas prices. The only way households and businesses can mitigate the impact of higher electricity bills will be by improving energy efficiency.”

Michael Liebreich, chief executive of Bloomberg New Energy Finance, said: “The UK is reliant for its heating on natural gas, and for its transportation on imported oil. By shifting its electricity mix in this way, UK electricity consumers will pay a little more – 10p per person per day by 2020 – but they are insulating a proportion of the country’s energy demand from global gas price volatility.”

Figure 1: Estimated increases in domestic electricity prices, 2012-20 (p/kWh)

Source: Bloomberg New Energy Finance, Eurostat, DECC, Committee on Climate Change Note: RO, CfD, FiT stand for Renewables Obligation, contract for difference and feed-in tariff respectively.

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[1] This partly reflects the CCC’s assumption of more generation before the end of the decade by costlier technologies such as nuclear, carbon capture and biomass.