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Ofgem permits £12 energy bills rise for grid upgrade
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The investment programme will hook up new wind and nuclear generators to the grid and run more high voltage cables underground, among other things
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The energy regulator will permit firms running the UK’s electricity and gas grids to add an average £12 to annual energy bills for the next eight years to pay for upgrades and maintenance.

Ofgem said it had cut £7bn from the total cost of work on UK transmission networks planned by energy firms.

The biggest of these firms by far – National Grid – said it was reviewing the “lengthy and wide ranging” plans.

Meanwhile a lobby group warned 300,000 more homes faced imminent fuel poverty.

Energy prices have risen 7% on average this year, according to the Fuel Poverty Advisory Group, and are set to leave more households paying more than 10% of their income on home heating unless the government takes action.

Tax change
Ofgem’s announcement will enable £24bn in total investment in the energy networks up until 2021.

However, an Ofgem spokesperson told the BBC that over half of the £12 bill increase was not due to physical investment in the network, but was instead because of a change in accounting rules which would mean that energy firms could no longer claim back tax on the cost of replacing parts of the network.

The regulator’s announcement represents a slight increase on the £22bn investment allowance that Ofgem initially proposed in July – adding an average £11 to bills – which was attacked by National Grid for being insufficient.

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What is fuel poverty?

A household is considered to be in fuel poverty if more than 10% of its income is spent on home heating.

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“In analysing the proposals, we find numerous errors and questionable judgements which we cover in detail in our response,” the company had said of the initial plans in an open letter to Ofgem.

Under Ofgem’s revised proposal, the average increase in annual bills between 2013 and 2021 will equal £12, starting close to £8 at the beginning of the period, and rising to £15.10 by the end.

If National Grid chooses to challenge Ofgem’s new decision, it has until March to refer the matter to the Competition Commission.

National Grid and the distribution firms do not charge households directly for the cost of maintaining the grid, but the cost is instead passed through by electricity and gas suppliers.

The total cost of transmission and distribution comprises about 21% of gas bills and 10% of electricity bills.

Underground cables
Ofgem said that the increase in allowances compared with their July proposal was because the regulator had agreed to let gas network firms charge more for the cost of replacing gas mains.

Energy Secretary Ed Davey: “The big drivers on energy bills are wholesale and network costs”
National Grid operates the UK’s national electricity and gas grids, as well as four of the country’s eight regional gas distribution networks.

The electricity network in Scotland is owned by two other firms – Scottish and Southern and SP Energy Networks.

Ofgem had already reached an agreement with the Scottish firms in March over their investment plans, the cost of which will contribute £3.70 of the £12 average bill increase, to be borne equally across all UK households.

The planned investment spending across the UK is split between £15.5bn on electricity transmission and distribution, and £8.7bn on gas.

The investments will, among other things, hook up new wind farms and nuclear power stations to the electricity grid to replace traditional coal-fired power stations, and enable more liquefied natural gas imported from Qatar and elsewhere to be added to the gas network as North Sea gas supplies dwindle.

Other improvements will include the running of new and some existing high voltage cables underground, particularly where they affect areas of outstanding natural beauty, and the construction of a new undersea link connecting Scotland with England and Wales.

The spending on the gas network will also finance spending by the energy firms on raising public awareness about the risk of carbon monoxide poisoning.

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Energy firm E.On will raise prices for dual fuel customers by 8.7% on 18 January, the company has said.

All of the major energy providers have now announced price rises this winter for UK domestic customers.

However, price changes might differ depending on where residents live in the country.

E.On had pledged that it would not change prices before the end of 2012, which prevented any announcement before the start of December.

Those who have just electricity supplied by E.On will see a price rise of 7.7%, but gas-only customers will see prices go up by an average of 9.4%.

“We have held back from increasing our prices for as long as we possibly could and at the same time have worked hard to reduce our own costs as a business so that our customers can get the best price possible,” said Tony Cocker, E.On chief executive.

E.On dual fuel customers will see their bill rise by just over £100 a year on average as a result of the imminent price rise.

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Latest round of price rises

SSE: 15 October, gas and electricity up 9%
British Gas: 16 November, gas and electricity up 6%
Npower: 26 November, gas up 8.8%, electricity up 9.1%
Scottish Power: 3 December, gas and electricity up 7%
EDF: 7 December, gas and electricity up 10.8%
E.On: 18 January, gas up 9.4%, electricity up 7.7%
Gas bill revamp for small firms
How your gas bill is set to change
The announcement follows price rises of between 6% and 10.8% introduced by the “big six” energy companies over the last few months.

Consumer groups and commentators have reacted with disappointment, but little surprise, that E.On has joined the list.

“This set of industry wide price rises could not have come at a worse time, with the UK economy still faltering and a very cold winter forecast,” said Mark Todd, of price comparison website Energyhelpline.com.

“Households will have to contend with the double whammy of bigger bills and lower temperatures, pushing heating bills higher and putting further pressure on austerity-hit households.”

Cost pressures
E.On blamed rising wholesale prices that it paid, the cost of transporting energy to homes, and the increasing cost of government social schemes for the price rise.

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Most industries will pass on rises in costs, but given the low levels of confidence consumers need to be reassured”

Audrey Gallacher
Consumer Focus
It also suggested that the cost of creating more renewable sources of energy was a key factor in the costs it faced.

“I understand the reasons behind these increases as Britain seeks to reduce energy waste, and invest in both new lower carbon electricity sources and in new or improved gas and electricity networks,” said Mr Cocker.

“However, at a time when family finances are being squeezed hard and energy bills become a bigger part of the weekly spending, it is vital that everyone who takes a share of energy bills explains what that money is for and justifies those rising costs to customers.”

He added that he believed the company’s profit margins were “fair”. He said that the margin it made on the residential business was less than 2% last year, and this year’s level would be declared when its annual results were published.

E.On customers were hit by an 18% gas price rise and an 11% electricity price rise in late 2011, although there was also a price cut for the latter of 6% early in 2012.

Customers would be sent a letter, Mr Cocker said, explaining the reasons for the latest price increases.

Audrey Gallacher, of watchdog Consumer Focus, said: “Most industries will pass on rises in costs, but given the low levels of confidence consumers need to be reassured that retail bills, wholesale costs and company profits are in balance.

“It is a complex picture, but billpayers need to know that wholesale prices and other costs have increased enough to justify these rises. As it stands, the pressures on price are just too opaque and contested to provide confidence.”

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