Ofgem Price Cap Rises

What is behind the latest increase in energy bills and what does it mean?

Ofgem Price Cap Announcement

Today, Ofgem announced an increase in the energy price cap. The headline annual charge for the average household has gone up by £149 or 9.5% to £1,717 per year.

Ofgem outlined the main reasons for the increase in their letter to the market. The main driver of the price rise is wholesale gas-prices. Higher gas prices push up the costs of electricity as well as the price of gas for home heating. The wholesale cost increase accounts for £123 of the increase. The costs of the smart meter programme have gone up by 31%, adding £5 more to our energy bills. Extra network costs, higher VAT and a bigger profit allowance partly balanced by lower policy costs make up the rest of the change.

Energy Secretary Ed Miliband has taken to X/Twitter to blame the price rise on the “toxic legacy” of the previous Government. Apparently, the last Government left “families at the mercy of international markets controlled by dictators.” Miliband’s solution is to “sprint towards clean, homegrown power.” He claims this will “get our country out of the grip of high energy prices for good.”

Misguided Government Solution

The trouble is, Ed is living a pipedream. As previously discussed, existing renewables are more expensive than gas-fired electricity. This is even before considering the extra costs of grid balancing, network extensions and the capacity market. Moreover, the price of gas-fired electricity also includes arbitrary carbon taxes.

Ofgem has lifted its estimate of the whole price of electricity to £86.75/MWh (see Annex 2, Table 1b) and even this is below most of the prices on offer in the current AR6 renewables auction (see Figure 1).

Figure 1 - Comparison of AR6 Strike Prices and Ofgem Wholesale Price (£ per MWh)

If the balancing and other on-costs for renewables are added, then all of the renewables being offered in AR6 will be more expensive than the Ofgem wholesale price even with elevated gas prices. And of course, the CfD prices are index-linked so they go up every year. The most obvious solution to high gas-prices and energy insecurity would be to invest in new sources of supply both offshore and onshore through fracking. But of course, the new Labour Government is doing the exact opposite by keeping the ban on fracking and is moving to ban new North Sea developments.

Industry Commentary

It seems that even Ofgem does not believe Ed Miliband’s pronouncements. The Chief Executive of Ofgem, Jonathan Brearley joined Sky News to explain the decision (see link below).

He was asked directly whether he agreed that making the UK into a green energy superpower would bring prices down. Interestingly, his weasel-worded answer claimed only that renewables would make prices more stable. He also warned that a “huge amount” of infrastructure is also required, but he omitted to make clear that this too would have to be paid for through our bills.

Emma Pinchbeck, CEO of Energy UK also took to X/Twitter to opine on the price rise and set out her solutions. Her first proposal is to move some of the policy costs (aka subsidy costs) for renewable electricity into general taxation. Of course, this is not fixing the problem at all, it is merely hiding the true costs of policies Emma has been advocating for years. Emma’s second proposal is to move the remaining subsidies from electricity bills on to gas with the aim of achieving “a ratio of electricity to gas prices of around 3:1 to help reduce reliance on gas.” In other words, pretend electricity is cheaper than it really is and that gas is more expensive. This is of course to force us all to use heat pumps. Heat pumps can only have operating costs comparable to gas boilers if electricity is less than 3 times the cost of gas. The price cap announcement set gas prices at 6.24p/kWh and electricity almost four times more expensive at 24.5p/kWh. Pushing the cost of renewable electricity on to gas would have the short-term impact of pushing up the cost of heating our homes.

This is a tacit admission from Emma that renewables are not cheap and that adding more will push up electricity bills. Of course, as a major policy influencer, she wants to hide the impact of this massive policy failure.

Conclusions

It is true to say that the major driver of the increase in the price cap is higher gas-prices. However, the proposed solution of more intermittent and expensive renewables is at best misguided.

When industry commentators like the CEO of Ofgem can no longer parrot the “cheap renewables” line and the head of Energy UK is publicly calling for the costs of the disastrous experiment in renewables to be hidden and shifted on to gas, then you know the Net Zero project is in big trouble. However, we have a Government of zealots and they are unlikely to change course until a big failure occurs. Only then will we get to some sort of rational energy policy that must include developing more of the abundant resources beneath our feet and under our territorial waters. Until then we need to buy more woolly jumpers.

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