Ofgem warns of 60 per cent spike in energy bills

Businesses were today urged to step up efforts to curb energy use, after Ofgem warned that energy bill could rise 25 per cent over the next 10 years with occasional price spikes leading to increases of 60 per cent.

The report, which has been billed as the most comprehensive review of the UK's energy supplies ever undertaken, warns that volatile global gas and oil prices, supply insecurity and the need to invest up to £200bn in new low-carbon energy infrastructure means domestic energy bills will rise by between 14 and 25 per cent by 2020. Businesses' energy bills are expected to track the domestic market with firms facing similar price hikes.

The report also maps out four different scenarios for the UK's future energy supplies and warns that a strong economic recovery could spark a "dash for energy" that results in tight gas supplies and leads to energy bill price spikes of up to 60 per cent by 2016.

"Our scenarios suggest that Britain faces a tough challenge in maintaining secure supplies while at the same time meeting its climate change targets," said Ofgem chief executive Alistair Buchanan, adding that the watchdog would put forward proposals early next year on how to address a potential energy crunch.

The report suggests that heavy investment in renewable energy coupled with a slow economic recovery would not only help ensure the UK's carbon emission targets are met, but would also have the smallest impact on energy bills by reducing the UK's exposure to volatile supplies of foreign oil and gas. Under this scenario, where governments around the world increase investment in low-carbon technologies, the effect on domestic energy bills is an increase of just 14 per cent by 2020.

In contrast, a rapid recovery combined with investment in renewables and low-carbon technologies would lead to bill increases of 23 per cent by 2020, while a scenario where slow economic growth leads to limited investment in new energy infrastructure would also result in price hikes of 22 per cent by the same date.

A spokeswoman for Ofgem said the prospect of increased energy bills should encourage firms to step up investment in energy efficiency measures. "It's plain that energy efficiency is a good thing and people will need to be increasingly conscious of energy efficiency measures as prices rise," she said.

Price rises of up to 25 per cent will also reduce the payback period for energy efficiency and onsite renewable energy investments by significantly increasing the savings that can be realised through such measures.

"The pay back periods for insulation is already just a couple of years, but it will get even quicker as prices rise," said a spokeswoman for the Energy Saving Trust. "Our advice would be to just get on with it."

Richard Gledhill, global leader for climate change and carbon markets, at consultancy giant PricewaterhouseCoopers agreed that rising energy prices would increase incentives for energy efficiency investments, arguing that governments should resist the tempetation to intervene and try and keep energy prices artificially low.

"Keeping down the price of energy for all, removes the vital financial incentive for efficiency," he said. "We need to work much harder at energy efficiency in our homes and offices to reduce consumption and this will help to contain the cost concerns. The Government is obviously concerned about fuel poverty, but in a low carbon economy, this probably needs to be addressed in new ways, not be keeping fuel prices low for all."