Power play over the 'energy crunch'

Image copyright SPL
Image caption The energy market is responding to shifting cost and political pressures

It's get-tough time. John Swinney, Scotland's economy secretary, is out to kick some bahookey when he next meets Scottish Power executives.

Following their sharp increases in energy prices, he says they need to explain themselves.

Chris Huhne, the UK's energy secretary, is telling that company's customers to shop around for better value. He doesn't seem to have noticed that industry experts, and inexperts besides, all expect other energy suppliers to follow Scottish Power's unpopular lead.

But could it be this has a lot to do with choices the politicians have been making, or failing to make?

Energy bills include several elements. Just under two-thirds of bills are explained by wholesale prices. One pound in six goes on the cost of distribution, for both gas and electricity.

Transmission charges through the major grid networks account for 2% of gas costs and 4% for electricity.

Then there's VAT, which has stuck at 5% while the main rate has gone up.

Renewable upgrades

But what about the 'environmental' cost? For the average gas bill, that costs 4% of bills sliced off to promote renewable energy, cut emissions and generally tackle climate change. For electricity, it's 10% of your bill.

And of course, the decision to charge that is not down to the power companies, but to government and regulator - fulfilling international commitments on carbon emissions, and in some cases going further and faster.

The SNP government, for instance, is committed to sourcing 100% of Scotland's electricity needs from renewable sources by the end of the decade. However laudable in environmental and industrial strategy terms, that's going to cost money. And it's not government that's paying the price, but consumers.

It's reckoned about £200bn is needed to upgrade Britain's energy infrastructure, to meet the aspirations of renewables and to catch up with low investment in the industry over recent decades.

That catch-up is required because politicians of other political colours were slow to respond to the looming energy crunch point, preferring to pretend that energy bills could be kept low.

The investment programme includes wind farms, and the pylons and cables to get power into the grid. Then there's the re-orientation of the grid itself to bring energy from renewable sources to population centres.

It also includes new pipelines and terminals to bring gas from outside the UK, and it goes some way to the high costs of creating a North Sea supergrid for electricity. And a large chunk of the bill is from replacing ageing power stations, with cleaner burn and emissions technologies.

Pricing clarity

So while Scottish Power this week announced it will load 19% onto gas bills and an average 10% on to electricity, how much more will these choices cost consumers in future?

An analysis by Ofgem, the industry regulator, concluded the best case scenario for energy prices is a rise of only 14%. This was written in 2009, when it was not clear that world energy prices would recover from recession. Since then, they have.

Image copyright PA
Image caption Ofgem has looked at the cost of moving towards new sources of energy

Its scenarios ranged more realistically above 20% to a high of a 60% increase by 2016, and then falling back. That would see a sharp spike in global gas prices.

That level of pessimism might be overdoing it. Although there are several reasons for upward pressure, the gas price has not seen oil's rapid increase, largely through new sources of gas being cracked open with the fracking boom, and there is improving capacity for importing liquid natural gas by tanker.

Last December, Ofgem took another look at the cost of changing generation and distribution networks to reflect new renewable sources of energy, and the impact that could have on bills.

That report suggests more modest increases for consumer bills this decade. But within the next 40 years, it assumes electricity bills will have more than doubled to pay for the new investment, from just over £400 last year to between £800 and £900, in real terms.

Clearly, there is pressure to be put on the energy utilities; to ensure they don't abuse their market power, to add clarity to pricing, and to ensure they respond as fast to downwards wholesale prices as they do to the upward pressures.

But there's also some clarity required about the political decisions that contribute to those increasing bills, and about the era of cheap energy that's now behind us.