Surging policy costs will force Ofgem to raise price caps

Surging policy costs will push up household electricity bills by almost a third by 2025, experts have predicted, giving Ofgem “little choice” but to repeatedly raise price caps in future.

With payments to low-carbon technologies set to double to £15 billion, the average contribution to policy costs will swell to £206 by the middle of the next decade, according to analysis by Aurora Energy Research, making up a quarter of total spending on power.

The market intelligence firm said the average electricity bill has already risen by 2 per cent per annum over the last three years – from £583 in 2015 to £619 in 2017 – due to growing policy and wholesale costs. Accordingly, Ofgem bumped up the existing cap safeguard tariff for vulnerable customers and those on prepayment meters by £57 per household, which came into effect on 1 April.

Aurora expects the figure to climb by another 30 per cent – or £188 – by 2025, as policy costs escalate by £70 and wholesale costs by £69. Despite gains in energy efficiency and the proposed clamp down on network returns during the RIIO2 price controls, the typical bill is projected to reach £810 per annum, representing a yearly inflation between now and then of 3.2 per cent.

“This will mean that, under the price cap model, Ofgem will have little choice but to allow repeated increases in energy prices for the foreseeable future,” the analysis states.

Source: Aurora Energy Research

Last week saw Ofgem release its third working paper on the proposed price cap for the 11 million customers on standard variable tariffs. There were also price hike announcements from British Gas, Eon and EDF, with British Gas blaming the increase on rising wholesale and policy costs.