It is easy to predict where the energy regulator will set the next quarterly price cap on Wednesday. It’s just a matter of tracking wholesale prices in Ofgem’s relevant backward-looking “observation period”. Energy consultant Cornwall Insight thinks the typical household bill be £1,850, an increase of £209 from the previous quarter. It will be surprising if it is out by more than a few quid.
One can also make a fair guess at the regulator’s messaging. It will talk about the unavoidable impact from the surge in energy prices that followed the closure of the strait of Hormuz. It may also say the increase would be even greater than 13% without the additional wind and solar generation on the system these days. Fair enough. Gas sets the wholesale price of electricity only 60% of the time now, down from 90% not long ago.
What we won’t get from Ofgem, however, is a multi-year forecast for bills. Does everything return to normal if and when Hormuz opens? What is “normal” these days? Is the typical bill of £1,200, or thereabouts, of the era before Russia’s invasion of Ukraine in 2022 ever coming back?
Ofgem doesn’t do medium-range forecasts – at least not for public consumption. But it could do so easily, and with reasonable precision on the electricity side, because a chunk of the system-wide costs are nailed down in advance.
Gas bills are different because wholesale prices play a more influential role. But, in electricity, only a third of the bill comprises wholesale costs. The rest is “non-commodity” costs, which means charges to cover the cost of running and upgrading the grid, carbon taxes, the cost of the warm home discount for vulnerable households, charges to pay for new nuclear plants and much more. Meanwhile, new renewable generators operate under “contracts-for-difference” where prices are fixed for 15 or 20 years.
In some of those non-commodity categories, there is serious inflation on the way. Last month a document from Neso, the national electricity system operator, projected that Network Use of System charges (the bulk of which are passed on to consumers) will rise from £7.6bn this year to £12.1bn in 2029-30 – a near-60% increase as the five-year £70bn upgrade of the grid continues.
On “thermal constraint” or “balancing” costs, meaning the costs of paying windfarms in Scotland to turn off on windy days to ensure transmission wires don’t catch fire, and paying other generation sources (usually gas-fired stations or inter-connectors to the continent) to turn up, the numbers are truly dramatic. “Unfortunately, balancing costs are increasing and are predicted to go up from around £2bn a year now to as much as £8bn by 2030,” said Neso. They’re due to fall thereafter, assuming the grid build-out runs to schedule, but that is a lot of cost to go through bills.
Such trends came as a shock to MPs when the bosses of the big retail suppliers spelled out the implications for bills on the way to 2030 at a select committee last autumn. “Even if the wholesale price were to halve, bills will rise,” said EDF’s UK chief executive. Octopus Energy’s representative counselled: “If we continue on the path we are on, in all likelihood electricity prices are going to be 20% higher – even if wholesale prices halve.”
It’s not only them saying it. On an admirably clear podcast from the Institute for Fiscal Studies last week, asking “why is UK electricity so expensive?”, Oxford University’s Sir Dieter Helm pointed, among other things, to the basic impact of doubling the capacity of the grid to 120GW to accommodate intermittent renewables plus backup gas generation. Demand for electricity, meanwhile, has only just started to increase after years of gentle decline. “This is a very high-cost energy economy for the next decade and a half,” he said.
None of which is an argument for resisting energy transition, a policy with strong public support. But there ought to be far greater official clarity about costs and how long it will take to reach the big prize of a low-carbon system in which low running costs translate into lower bills.
Even the Climate Change Committee (CCC), which is obviously keen to emphasise the benefits of a renewables- and nuclear-based system, is careful not to over-claim on bills in the short-term. On an episode of The Rest Is Money podcast, the committee’s chief executive, Emma Pinchbeck, pointed to “the 2030s” as the point when better “price signals” on electricity should arrive thanks to the expiry of expensive subsidies used to support older wind and solar projects.
Ofgem, an independent regulator with a big budget, could do everybody a favour by providing transparent models. There are three reasons to do so. First, its duty is “to protect the interests of energy consumers” – and those consumers would surely like to know what’s probably coming. Second, Ofgem should be embarrassed that the most granular forecasts on electricity bills come from an independent analyst, Ben James, whose website is followed avidly in energy land. (He is estimating a £79 increase in average electricity bills from 2025 to 2030.)
Third – and most importantly – more openness on the part of Ofgem would help the crucial political debate about where all the levies, taxes and charges on electricity bills properly belong. Should more be taken in general taxation? So far, the chancellor has removed £150 for consumers for three years but, as we are seeing, she has barely moved the dial.
The CCC has been shouting for years that electricity should be made cheaper sooner to incentivise the take-up of heat-pumps and electric vehicles, which is where the big decarbonisation gains are available. Meanwhile, the CBI and the trade body Energy UK, like Helm, point to the devastating impact on British industrial competitiveness of having some of the highest electricity prices in the world.
The danger is that, on its big day in the spotlight, Ofgem narrows everybody’s focus to quarter-on-quarter numbers. Yes, the size of the next bill for consumers obviously matters. But the multi-year path of electricity prices affects the entire UK economy. For the sake of grown-up debate about political choices, Ofgem ought to publish medium-term projections.
