Ofgem: Energy industry needs more public money

The regulator's probably right that the state needs to subsidise investment. But its timing isn't great...

Last Updated: 31 Aug 2010

Energy regulator Ofgem hit the headlines today with dire warnings that some of us won’t be able to afford to heat our houses in a few years’ time, unless there’s a major overhaul of the UK energy market. The current liberalised system may be good for the consumer, since it tends to push prices down. But, Ofgem argues, it doesn’t give energy companies any incentive to stump up the £200bn investment in infrastructure we need to secure a sustainable energy supply. The regulator’s probably right that state intervention is the only way to fill this gap – but in case it hasn’t noticed, the Exchequer doesn’t really have £200bn going spare at the moment…

There’s clearly a problem here. The UK energy market is a legacy from the Thatcher days, when we used to produce most of our own energy via North Sea oil. Nowadays we’re actually a net importer of energy, which makes us much more vulnerable to price swings. In fact, Ofgem reckons that energy bills could rise between 15% and 20% by 2020, which would presumably mean that some people won’t be able to afford their heating bills. Not to mention the fact that businesses will face higher operating costs, hurting the UK’s international competitiveness.

The obvious solution is to generate more of our own power. But our ageing power stations are in desperate need of a refit – and at the moment, the energy companies don’t have much of an incentive to invest the £200bn or so that Ofgem thinks is required. Spending a fortune on new generators will presumably mean higher prices, which under the current set-up will hurt sales. The climate change agenda also muddies the water: the drive to reduce emissions affects what kind of power stations we should be building, but after the fiasco of Copenhagen, we’re no nearer to knowing what’s going to happen to carbon pricing in the future – another disincentive to invest. So Ofgem’s solution is for the Government to step into the breach – possibly by centralising the buying of power again, thus standardising prices and encouraging investment.

Paying through the nose to import all our energy is clearly not good for consumers or businesses. So Ofgem is right that we need to work out a way of paying for new power stations (whether that means nuclear, clean coal, wind or whatever). Since the private sector can’t be expected to foot the bill if they’ll be punished for it commercially, that does suggest the Government needs to step in and change the way the market works. Because let’s face it: the Treasury can’t afford to shell out £200bn on energy infrastructure any time soon. Better go and buy some candles.

In today's bulletin:

Ofgem: Energy industry needs more public money
Setback for UK as snow puts freeze on services recovery
Orange and T-Mobile tie-up to face OFT scrutiny?
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