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The energy watchdog today said UK consumers faced potentially steep price rises in their gas and electricity bills as supplies become more volatile.

In a review of Britain's energy market, Ofgem said an investment of up to £200 billion is needed to secure supplies and meet environmental targets.

It lists four possible scenarios for the future and in one - that of a strong resurgence in global economies along with missed renewable and carbon targets - Ofgem warned prices could surge by more than 60 per cent by 2016 before falling back.


Ofgem said the cheapest scenario - with a hike in bills of 14 per cent by 2020 - factors in a slow recovery from the recession, coupled with global green stimulus packages.

In this option, high carbon prices and Government policies support investment in renewables, nuclear and carbon capture and storage.

Another scenario sees green measures coupled with strong economic growth and consumer bills rising by 23 per cent by 2020.

Ofgem said this would see Britain's reliance on gas fall, but demand for electricity would increase with a greater use of electric vehicles and heat pumps.

The regulator said that if the recession continues and gas and electricity prices remain low in the short term, it could reduce the incentive to build new nuclear and renewable power infrastructure.

In this scenario, the country would be increasingly reliant on imported gas for new gas-fired power stations and while bills would not rise by much in the early years, they are expected to climb 22 per cent by 2020.

Ofgem said the possibility of a 60 per cent hike in bills by 2016 would be caused if wholesale gas prices spiked as a result of resurgent global economies competing for energy resources.

This scenario also assumes that no new nuclear facility would become operational before 2020.

But the regulator said even in this scenario, bills would drop back and it predicts that by 2020 consumers would pay 25 per cent more than this year.

The four scenarios include reductions in carbon emissions of between 12 per cent and 43 per cent from 2005 levels.

Ofgem said the biggest challenges to Britain's energy supply are the country's growing reliance on a volatile global gas market and its ageing power stations, which are nearing the end of their lives.

The regulator also said "significant changes" may have to be made in the way we consume and generate power to manage the "variability associated with increasing reliance on wind power".

It said a "massive" investment of between £95 billion and £200 billion in power plants and other infrastructure was necessary "to secure both energy supplies and climate change targets".

Ofgem chief executive Alistair Buchanan said: "These are big challenges. Consumers are already enduring high energy prices.

"This is why we are consulting with consumer and environmental groups, the academic community and industry to ensure any policy proposals we make are grounded on the best evidence available.

"Early action can avoid hasty and expensive measures later."


Gary Smith, national officer of the GMB union, said: "This report demonstrates that central planning is essential to ensure that the lights stay on.

"How many more red light signals do our politicians have to see before they take action?"

Shadow energy secretary Greg Clark said the challenges in the energy sector came about because of Government "dithering".

He said the Tories would take "immediate action" to authorise five gigawatts of capacity in clean coal and publish planning guidance for companies wishing to invest in nuclear power - which he said ministers had held back without good reason.

"This is the characteristic over the last 12 years," Mr Clark said.

"There has been no policy, effectively. We are in the situation we are because they have had their head in the sand for 12 years."


Ofgem said current rates of investment would have to be more than doubled to meet the high levels needed.

Consumer bills will be pushed up by the level of infrastructure investment and by the increasing cost of carbon - particularly if oil and gas market prices continue to rise as they have been since 2003, or spike sharply.

Gas dependence is predicted to increase "dramatically", especially if environmental measures are not fully successful.

The regulator identified the greatest risk as maintaining gas supplies through a severe winter.

Ofgem said that while the outlook for this winter is "more comfortable" - with National Grid anticipating high capacity and good gas infrastructure - its analysis suggests "that existing regulatory and market arrangements may well be tested severely over the next two decades".

Today's report outlines the regulator's provisional assessment of supply issues and is due to make further recommendations - potentially including new policy - at the end of the year.

Association of Electricity Producers chief executive David Porter said Ofgem was "absolutely right" to call for investment in the energy sector.

He warned it was not possible to deliver changes "on the cheap", adding: "In the end, the customer does pay."

And he told BBC Radio 4's Today programme: "What we need to do is make sure that the political and regulatory framework that we operate in enables companies to make the right economic decisions, and then customers will have the least possible price increases."

 

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