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Simon Henderson

Securing our energy future

7 July 2011 Posted by Simon Henderson

In late June, our Chief Executive Sam Laidlaw gave a speech at an energy conference run by The Economist. His main aim was to convey that the energy industry - suppliers, regulators and the Government - need to be more transparent with energy users about the challenges the industry faces and the steps we need to take to move forward on the right track. Why? Because the reality of the energy situation in the UK means that the public needs to be able to take ownership alongside government and business in order to meet the obligations that will enable us to have a sufficient supply of energy in the future.

The full transcript of Sam's speech is available here, but in summary I've outlined some of the key messages below:

In a recent poll commissioned by Centrica (http://files.the-group.net/library/centrica/client_upload/File/Populus_polling_data.pdf), we learned that only 1% of respondents said they would be prepared to pay an extra £500 on their annual bill to ensure decarbonisation and security of supply, and about half said they wouldn't want to pay any increase at all.

These figures are surprisingly low. Part of the problem is that consumers are being given the impression that, if only the market were more competitive, prices would actually fall.

This is not the case. Retail margins only make up a very small proportion of the bill (6% to 9%) with the big components being:

  • Cost of the commodity that we buy on the world markets
  • The cost of the transportation (that we pay to National Grid and others) and
  • The cost of supporting our environmental and social obligations.

All three of these costs are unfortunately moving upwards. Wholesale energy costs face upward pressure due to a range of global (rather than domestic) reasons: not least Fukushima and Japan's increasing demand for gas, unrest in the Middle East and North Africa, and a growing demand for gas in Asia.

It is estimated that it could cost up to £200bn by 2020 to decarbonise the power industry and ensure that the lights stay on, more than doubling the rate of investment seen over the last 10 years. Encouraging our customers to enhance the energy efficiency of their homes and businesses will definitely help us make headway, but it won't be enough. The UK energy regulator Ofgem has indicated that as a result of the required investment, as well as the continued pressure to reduce carbon levels, consumer bills could rise by between 23% and 52% over the next decade.

It's a big challenge and the point made by Sam in his speech is that the UK energy industry is caught between volatility in the world market, commitment to carbon cuts, and our obligation as a society to ensure that energy remains affordable, just as household wealth faces its biggest squeeze in a generation. It is a very difficult circle to square - but we must ensure that consumers are made more aware of the challenges and understand their role in helping to overcome them.

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