According to UK energy regulator Ofgem's Project Discovery review, domestic energy bills could surge by as much as 60% in order to fund a predicted GBP200 billion needed to meet future energy demands and realize carbon reduction targets. While it is only one of a number of projected outcomes, efforts must be made now to avoid this worse-case scenario.
Ofgem's Project Discovery review outlines prospects for secure and sustainable energy supplies over the next 10 to 15 years, and presents four possible scenarios: dash for energy; slow growth; green transition; and green stimulus. Each scenario projects a bleak outcome under which prices rise sharply above the rate of inflation and are largely determined by the pace of economic recovery, adherence to green measures, levels of infrastructure investment, carbon prices and national policy.
Datamonitor expects that the UK is most likely to follow the 'dash for energy' scenario, in which world economies quickly rebound, energy markets tighten on resource competition, sufficient nuclear capacity fails to come online before 2020 and green targets are missed. Although the forecast 60% rise in energy bills by 2016 under this outcome appears extreme at first glance, it is important to note that electricity bills faced little resistance in climbing nearly 50% since 2000, while gas soared 120% over the same period.
Supply is set to come under threat from the loss of an estimated one-quarter of the UK's generating capacity, as old age and EU green measures (in the form of the Large Combustion Plant Directive) push most of the nuclear and nearly half of all coal and oil-fired stations to close by the end of 2015. The construction of new gas-fired plants should help to fill the gap, but with a larger share of gas in the generation mix, the UK will face increased exposure to volatile world energy markets. Dependence on foreign gas will also rise, and although Norway, the Netherlands and Belgium account for the majority of imports, Russian supply shocks will also pose a risk, as EU wide shortages would have a significant impact.
Further challenges will yet stem from the global downturn. With the economic recovery in the UK expected to lag behind that of other major EU countries, and energy demand growth accordingly greater elsewhere, incentives for investment in the country are likely to be relatively limited. Such an outcome will then only exacerbate the situation by putting further pressure on existing generating capacity.
What is abundantly clear is that tackling the energy challenges of tomorrow needs investment today. In total, GBP200 billion will be required to keep the lights on and rebuild dwindling infrastructure. With this, a consistent and concise government policy and long-term commitments are necessary to promote development and ensure that opportunities exist for companies to recoup their investments. There is no doubt that the market can deliver, but it is rather a question of when, implying that all efforts to remove obstacles to the market's stakeholders must be made in order to avoid this worst-case scenario.