Ofgem urges action over 'unaffordable' household energy prices

The energy watchdog today said electricity and gas may become unaffordable for an increasing number of households unless drastic action is taken to secure power supplies.

Ofgem said failure to reform the energy system could mean power shortages after 2015, while inaction will lead to a "degree of crisis" in three or four years.

It has predicted average household bills could jump as much as 25% - to nearly £2,000 - without radical moves.

But the Government today said it would be able to meet power needs in the years ahead, despite the watchdog's warnings of "reasonable doubt" over the security and sustainability of Britain's energy.

Ofgem said staying with the current market model is "not an option" as power supplies strain under the pressure of the financial crisis, environmental targets, dependency on imported gas and the closure of ageing power stations.

Ofgem chief executive Alistair Buchanan said without reform there could be a "degree of crisis" in 2013 or 2014 and warned the situation could then become "quite uncomfortable".

He said a failure to act would risk shortages after 2015 and mean customers would end up footing the bill for costly short-term solutions.

"We need to turn over all the stones with regard to the possible solutions that Government can address," he added.

The Government has indicated it will consider the report in its proposals for energy to 2050, due at the time of the Budget.

But Energy and Climate Change Secretary Ed Miliband said the Government was "confident" of meeting energy supply needs, with a low-carbon transition plan delivering secure supplies until 2020.

"However, for the longer term, Britain will need a more interventionist energy policy," he said.

Ian Parrett, of energy consultant Inenco, warned Britain had already left it too late to bridge the gap between older power stations going off-line and the emergence of new supplies "without making painful choices".

"We are left with a choice of meeting emissions targets or keeping the lights on," he said.

"The fact is that both domestic and industrial users will be hit hard by the failure to act - with supply becoming a major problem and with ever-increasing energy bills over the next decade."

Ofgem has said £200 billion of investment is needed in the next 20 years to ensure future supply, warning that even the least of its suggested policy measures would require "significant changes" and the most radical was a "dramatic move away from competitive markets".

Its most drastic suggestion would be to create a central energy buyer that would set the amount and type of new power generation required.

The Association of Electricity Producers said there was "a massive need for investment in new power stations", with around a quarter set to close down in the near future because they are old or do not meet environmental standards.

Chief executive David Porter said: "Make no mistake, the electricity industry wants to invest, but, in order to attract investment on that scale, we must have clear and stable policy, which investors have faith in."

Today's document said: "The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements and that the competitiveness of industry and business is affected."

Mr Buchanan said an Ofgem survey had found that 77% of consumers said they are concerned about future gas supplies.

He said this was probably because of high profile spats between Russia and Ukraine, Georgia and Belarus, which have caused concern about disrupted supply to the rest of Europe.

This winter threw fears over gas supplies into sharp relief as National Grid issued a series of alerts because high demand in the freezing weather coincided with production problems in Norwegian gas fields.

Mr Buchanan said the situation had shown that the industry could currently cope with serious challenges.

But he said while there was good gas capacity for the next two or three years, waiting a few years to address future shortfalls "could cause trouble".

Nick Winser, National Grid's executive director for transmission, welcomed the report and said Britain was heading for an "energy revolution".

"The current market framework has served us well, but it makes simple common sense that it will have to change to meet the big challenges ahead," he said.

Ofgem said there is a need for unprecedented levels of investment, sustained over many years "in difficult financial conditions and against a background of increased risk".

The uncertainty over future carbon prices is also expected to deter or delay market investment in low-carbon technology - with carbon prices down since the perceived weakness of UN climate talks in Copenhagen.

Andy Atkins, executive director of Friends of the Earth, said the free-market energy system "is failing the UK".

"Power firms make vast profits, consumers get ripped off, millions live in fuel poverty, and the UK has failed to make a significant shift to a low-carbon energy future - despite this country's huge renewable energy potential," he said.

Liberal Democrat energy spokesman Simon Hughes said there should be "an urgent national programme" to insulate all homes and deliver "the fastest possible growth" in renewable energy.