RWEnpower blames government policy for future price rises
Post Date: 16 July 2013
Energy prices will be 20% higher on average by 2020 as a result of Government policies and transportation, rather than being due to wholesale prices and companies seeking profit, RWE npower has insisted.
The company, one of the Big Six utility firms, is claiming that the average household's energy bill would be around £1487 per year, an increase of £240 by the end of the decade.
It claims this will mainly be due to the cost of government programmes to encourage energy efficiency and renewable energy, and the capacity market, part of the Electricity Market Reforms contained in the Energy Bill.
npower’s chief executive, Paul Massara, said some of the cost increase would be due to investment in new plant and infrastructure which was necessary, but, in an attempt to shift the public perception of avaricious utilities pushing higher prices, he said that the Government had a responsibility to tell consumers that bills will be affected by higher costs.
"For a long time, blame has shifted back and forth from energy suppliers to government, each pointing the finger at the other for rising costs. This blame game hasn’t helped people - if anything, they don’t know who or what to believe. It’s led to confusion, mistrust, and misinformation, and that’s something we urgently need to address," he said.
"This isn't about shifting responsibility - energy suppliers (also) need to play a big part in communicating this message and supporting customers," he added.
The firm claims to make just 5% profit in its retail arm, and that its calculations indicate that any future tariff increases will be due to factors over which it has no control.
Currently the price of gas and electricity on the wholesale market accounts for around 45% of the final price, but by the end of the decade this will be around 35%; the proportion due to government policies will rise to 22% by 2020 from 7% in 2007, representing an increase of 78%.
RWEnpower's report, Energy Explained, adds that transportation costs will add an additional £214 to the average domestic bill by 2020. It insists that supplier costs will remain flat, although it admits that the cost of rolling out smart meters will add £24 to the average bill.
The Government stuck to its line of saying that its policies will eventually bring prices down. Greg Barker, the Minister for Energy and Climate Change, issued a statement saying: "Gas prices not green policies have been primarily pushing up energy bills. That is why it is vital we crack on with securing investment in a diverse energy mix that includes renewables and new nuclear, as well as gas.
“We must also continue to drive up the energy efficiency of the nation’s housing stock, particularly the homes of the most vulnerable households," he continued. “Today our polices are keeping bills lower than if we did nothing – by an average of £65 for typical households. “In 2020, bills will be £166 lower than they would be if we left ourselves exposed to global price shocks, left our homes leaking energy, and left future generations to deal with climate change.”
Earlier this month, Ofgem proposed reforms that would limit suppliers to offering four core tariffs and to help customers find the cheapest option. These changes are expected to come into effect in December.
Wayne Mitchell, the Domestic Markets Director at npower, said in a blog last week that the introduction of Contracts for Difference CfD will initially make energy more expensive.
However, he added that this will only be the case to start with. "That’s why some of the strike prices offered start off higher, then reduce – for example, offshore wind projects will qualify for £155/MWh of support in 2014/15, falling steadily over the next five years to £135/MWh in 2018/19.
"But in terms of how this translates into additional cost per megawatt hour, that’s still hard to predict for a number of reasons."
One is that it remains unclear how the costs for implementing CfD will be recovered. The Government is currently expecting it to be at a variable rate, which will mean that the cost will vary according to how much is paid in strike prices for each period.
However, companies are vying to have a more predictable return on investment, which translates to a guaranteed ongoing price.
The final decision on the charging methodology is not expected until later this year.
There is also uncertainty about exactly how the Capacity Market will work. According to Mitchell, it discriminates in favour of the construction of new generation plant over existing plant by offering a much longer contract length for new entrants wishing to build new plants.
By offering less attractive terms to existing generators, it could perversely result in older plants closing earlier, stimulating the building of new, more expensive plant, thus pushing up prices for consumers. He estimates this could add an extra £15 per megawatt hour by 2018.
Yet the Capacity Mechanism also supports demand reduction. npower's Mitchell admits that this feature will reduce wholesale market costs by smoothing out the peaks that occur in the market when capacity is tight.
These thoughts are derived from a Round Table discussion on Electricity Market Reform held by the market participants and hosted last month by npower.
Caption: npower’s chief executive, Paul Massara, said the Government had a responsibility to tell consumers that bills will be affected by higher costs.
Story: David Thorpe, News Editor