Only way is up for energy bills, says NAO

According to the National Audit Office, energy bills will rise by 18% over inflation by 2020. Better stock up on candles...

by Andrew Saunders

Amidst all the recent bluster and outrage over utility bills comes a rare dose of realism from public spending watchdog the NAO this morning. It points out the incontrovertible fact that, whatever happens to wholesale prices, the UK faces a period of substantial investment in renewing ageing and inadequate infrastructure and that one way or another this has to be paid for.
Its sobering estimate is that utility bills across the board will rise by 18% over and above inflation in the next 17 years, in order to facilitate the capital investment required to modernise and upgrade our power stations and the transmission and distribution networks that serve them.
That’s an enormous increase and the news will go down badly in both Whitehall and across the nation’s hard-pressed homes and businesses. But it is a timely reminder to all of us that the age of cheap utlities may be drawing to a close, and that instead of a lot of noisy sloganeering (thanks to the Ed's, Miliband and Davey) some clear-headed thinking is required to decide how to tackle the problem.
From the business perspective, spending on UK infrastructure needs to be made sufficiently attractive to potential investors that they are willing to tie up capital in big ticket assets whose ROI cycles are measured in decades rather than months. The UK’s record on this has been abysmal, years of under-investment, broken promises and changed minds leading to the situation that we have to pay huge sums (look at the Hinckley Point saga) in order to persuade investors to come to the UK rather than take their money elsewhere.
From the consumer point of view, the big question is whether the market in energy is working. Economic theory suggests that it probably is not – markets where the power on the supply side is concentrated in the hands of a few large organisations, serving millions of small customers whose individual capacity to resist price rises is minimal, tend to become cartels.
Efforts to increase competition amongst energy suppliers are well meaning but the effects will likely be limited. It comes back to the NAO’s point - infrastructure is a long term game for those with deep pockets, not really your ideal start-up territory.  
On the other hand, the lack of a systematic and thoughtful response from government plays straight into the energy companies hands. So we see the latest game of carrot and stick, as the likes of EDF and SSE ‘offer’ to cut back on threatened price rises in return for a reduction in the green energy taxes currently levied on them.
But it’s not all doom and gloom – like all disruptive influences, rising energy prices will create start-up opportunities, most obviously in technologies to do with improving energy efficiency. If prices are going to rise, then it makes sense to spend a bit more on figuring out how to use less.
There are also choices in terms of how to distribute price rises, who should pay more and who less. But making them requires two things notably lacking so far – a informed debate about where we are and where we can realistically expect to get to, and some joined up and consistent thinking on energy from the Government.
Well, you can hope…  

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