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UK energy bills are not expected to fall significantly over the next decade, partly due to the costs of building out the electricity network to support the shift to renewables, the chairman of the energy regulator has warned.
Mark McAllister said in an interview with the Financial Times that Ofgem expected bills to “remain relatively flat over the medium term”, adding that he supported more “targeted support” for households struggling with their energy bills.
Before the general election was called last week, McAllister, who took up his role at Ofgem in November, said: “As we build in more and more renewables, so does the price, amortized over many years, of the networks too.
“As we look at the wholesale price forecasts and build on top of that the cost of the network going forward, I think in our view we’re looking at something that’s relatively flat over the medium term.”
The cost of energy is a key campaign issue ahead of the July 4 election, with both the ruling Conservative Party and the opposition Labor Party vowing to try to get the bills down.
Last week, Ofgem announced a 7 percent drop from July in the price cap that applies to most UK household energy bills due to falling wholesale costs, meaning typical households would pay £1,568 a year.
The cap will have fallen by more than 60 percent since its peak in January 2023, at the height of the energy crisis caused by rising wholesale energy costs, fueling inflation and a cost-of-living crisis.
Nevertheless, it remains above pre-crisis levels, generally below £1,100, partly due to the costs of laying and developing electricity and gas cables and pipelines, which will amount to £363 or 25 percent of the July 2024 ceiling compared to £254. in the summer of 2021.
The costs are inflation-related, but will also take into account the investments needed to develop cables and masts to cope with the rise of wind and solar farms, heat pumps and electric cars due to the shift away from fossil fuels.
National Grid recently said it would invest £31 billion in electricity networks over the next five years. Chief executive John Pettigrew noted that a “single-digit pound” impact on network costs on bills would be offset by the wholesale cost benefits of building renewables.
McAllister has joined Ofgem at a crucial time as Britain works towards its legally binding target of net zero carbon emissions by 2050. The regulator has a mandate to support the government in achieving this goal, in addition to its core role of protecting consumers.
Ofgem must enable huge investment to overhaul the energy system, with McAllister highlighting the benefits of developing “power that is locally generated and that we have full control over” in the form of renewables.
“Failure to reach net zero is not in the best interests of consumers,” McAllister added. “Consumers’ interests are not just about prices. It’s prices, energy security, net zero. All three are needed to protect the people of this country.”
McAllister, who has worked in the oil and gas industry, has joined Ofgem in its bid to rebuild its reputation after criticism that it was too slow to act after 30 suppliers collapsed during the energy crisis.
He said he thought Ofgem’s moves to tighten scrutiny struck the right balance. But, he added, suppliers’ customer service was “not as good as it should be” and the regulator needed to “strengthen our enforcement regime”.
He said the price cap introduced in 2019, which puts a cap on the unit rate for energy in standard tariffs, “has done some good things in the past” but may not be the best mechanism for the future energy system.
“Expanding targeted support for consumers must be part of the solution,” he added.
McAllister, former head of the Office for Nuclear Regulation, also warned of “a challenge towards the end of the decade” in electricity supply, given the closure of aging nuclear power stations and the delay in construction of the Hinkley Point C plant in Somerset by the government. French state-owned company EDF.
“We need to build new renewable energy sources and get sufficient capacity on the system in terms of storage. So yes, there is a challenge for us,” he said.
But he added: “We kept the lights on during the energy crisis; As a result, we will keep the lights on.”