The end of cheap energy?


powerScottishPower, which was controversially acquired in 2007 by Spain's Iberdrola, the world’s leading renewables generator, has announced some very sharp price increases. From August, ScottishPower’s retail customers will pay 19% more for their gas and 10% more for their electricity. On average, this represents a near £200 annual increase. The other five integrated energy suppliers – EdF, E.On, RWE, Scottish and Southern Energy and Centrica – are also expected to announce major price rises.

Given that Centrica’s domestic gas share is well over 40%, its gas pricing policy will be particularly carefully scrutinised. The media has expressed surprise and anger at these price increases. However, they are hardly unexpected. Most importantly, wholesale gas prices, which are a vital component of the UK’s energy mix, have risen in recent months. This trend heavily impacts electricity generation costs: gas-fired plant is now increasingly dominant.

Looking forward, it is difficult to see much relief. With new nuclear-build a decade away at best – the Fukushima accident makes this even less likely – the UK is becoming ever more dependent on gas generation. Any new coal-fired plant is seriously compromised by environmental issues, and the considerable expense of addressing them. And renewable generation is hardly cheap, especially if the cost of back-up plant is included. Furthermore, Germany’s planned exit from nuclear generation by 2022 is widely expected to push up long-term gas prices.

Ofgem has calculated that the UK’s energy investment bill over the next decade – assuming no major U-turns on environmental commitments – will be around £200 billion. Much of that investment is due to be undertaken by the six heavily-indebted integrated energy companies.

Hence, the prospects for lower energy prices are slim. Driven also by rising food input prices, as confirmed recently by several leading supermarkets, inflation remains well above target. Serious energy uncertainties and rising inflation are a potent combination for any government. Anybody remember the 1970s?