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British energy bills are not expected to fall substantially over the decade partly due to the costs of building out the electricity network to support the shift to renewables, the chair of the energy regulator has warned.
Mark McAllister said in an interview with the Financial Times that Ofgem expects bills to be “relatively flat in the medium term”, adding that he backed more “targeted support” for households’ struggling with their energy bills.
Speaking 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, we’re also building in the price, amortised over many years, of the networks as well.
“If we look at the forecasts for wholesale prices and then build on top of that the costs of the network going forward, I think we see something in our view that is relatively flat in the medium term,” he added.
The cost of energy is a key campaign issue ahead of the July 4 election, with both the ruling Conservative and opposition Labour parties promising to try to bring bills down.
Last week, Ofgem announced a 7 per cent fall from July in the price cap that governs most British household energy bills due to falling wholesale costs, meaning typical households would pay £1,568 per year.
The cap will have fallen more than 60 per cent since peaking in January 2023 at the height of the energy crisis caused by surging wholesale energy costs, fuelling inflation and a cost of living crisis.
Nonetheless, it remains above pre-crisis levels typically below £1,100, partly due to the costs of running and developing electricity and gas cables and pipes, which will account for £363 or 25 per cent of the July 2024 cap, compared to £254 in the summer of 2021.
The costs are inflation-linked, but will also factor in the investment needed to develop cables and pylons to cope with the rise of wind and solar farms, heat pumps and electric cars under the shift away from fossil fuels.
National Grid recently said it would invest £31bn in electricity networks over the next five years. Chief executive John Pettigrew noted 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 the UK works towards its legally binding goal of net zero carbon emissions by 2050. The regulator has a mandate to support the government in meeting this goal, on top of its core role of protecting consumers.
Ofgem needs to enable huge investment to overhaul the energy system, with McAllister stressing the benefits of developing “power that’s generated locally and we’ve got full control over” in the form of renewables.
“Not getting to net zero is not in the interest of consumers,” McAllister added. “The interests of consumers are not just prices. It’s prices, energy security, net zero. All three of them are needed to protect the population of this country.”
McAllister, who has worked in the oil and gas industry, has joined Ofgem as it tries to restore its reputation following criticism that it was too slow to act after 30 suppliers collapsed during the energy crisis.
He said he thought Ofgem’s measures to toughen oversight struck the right balance. But, he added, suppliers’ customer service was “not as good as it really ought to be” and the regulator needed to “sharpen up our enforcement timetable”.
He said that the price cap introduced in 2019, which imposes a limit on the unit rate of energy in default tariffs, had “done some good things in the past” but may not be the best mechanism for the future energy system.
“Expanding targeted support for consumers has got to 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” over electricity supply given the closure of ageing nuclear power stations and the delay to the Hinkley Point C plant being built in Somerset by the French state utility EDF.
“We’ve got to get new renewables built and get other sufficient capacity on to the system in terms of storage. So, yes, there is a challenge for us there,” he said.
But he added: “We kept the lights on through the energy crisis; we will keep the lights on through this.”