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Page last updated at 14:22 GMT, Monday, 7 November 2011
What is really fuelling energy bills in Britain?

Tom Heap investigates the rising cost of energy

As our autumn evenings turn cooler and darkness falls long before most of us get home from work, the inevitable worry about winter fuel bills starts to creep in.

For the six million in the UK already in fuel poverty - or spending at least 10% of their income on fuel - recent price hikes from the so-called "big six" energy providers have only added to the stress.

But what is really fuelling those price hikes?

Are energy companies lining their shareholders' pockets at the expense of cash-strapped householders?

Or is it down to the government's own energy policies - thrust upon the big six in order to accommodate ambitious "green energy" targets?

As it stands, the UK is committed to increasing the amount of electricity generated from renewables such as wind and solar from 7% to 30% by 2020 - a target that some analysts say is too ambitious and too costly.

Our EU carbon reduction target is to cut emissions by 20% from 1990 levels by 2020.

Boom time targets

The government has said the overall strategy is to switch Britain from an economy reliant on imported fossil fuels to cleaner, homegrown energy that is somewhat insulated from global fuel price swings.

Offshore wind is eye-wateringly expensive and against all the sort of government forecast that those costs were going to fall over the years, actually the cost of offshore wind keeps going up
Peter Atherton, Citigroup

But a new report by analysts at KPMG has found that Britain could save £34bn and still meet those EU 2020 carbon reduction targets if it dramatically scaled back on ambitious plans for offshore wind farms.

The report's authors have told BBC Panorama that a speedy move from coal to cleaner gas-fired energy generation would still allow the UK to meet EU emissions commitments and save consumers money at a time when home heating bills are at record highs.

Mark Powell, energy consulting partner at KPMG, said: "We need to get to a position where we can look consumers in the eye and say we have spent the least amount of money possible to give you power whilst still doing the things that we need to do for the benefit of all."

Mr Powell said the energy generation mix needs to be adjusted to reflect the economic realities in Britain today.

"The renewables target - as opposed to the carbon reduction target - was put in place in a different era. It was always going to cost the consumer more but we are now, unfortunately, in a different economic world in which unemployment is rising at the same time as energy prices."

'Eye-watering pricetag'

Peter Atherton, head of European utilities research for Citigroup, said given those high household energy bills and a sluggish economy, the government needs to reconsider the size and scope of its commitment to offshore wind generation.

Find out more
BBC Panorama logo
Tom Heap presents What's Fuelling Your Energy Bill?
BBC One, Monday, 7 November at 8.30pm
Available later in the UK on the BBC iPlayer.

"Offshore wind is eye-wateringly expensive and against all the sort of government forecast that those costs were going to fall over the years, actually the cost of offshore wind keeps going up," he said.

It is estimated that the cost of renewing our energy infrastructure and implementing both the EU carbon reduction and our renewables strategy by 2020 will top £200bn - with most of that cost being passed on to consumers.

Experts site the public opposition to large onshore wind farms dotting the landscape - and the lengthy planning approvals process - as a key reason why offshore wind farms are a preferred option for government.

But the further away the generation source is from the end user, the more expensive it is to create the infrastructure to carry the power to consumers.

According to the most recent figures from the Department of Energy and Climate Change, traditional power generators cost on average £78 per megawatt hour to feed into the power grid, whereas electricity from offshore wind farms costs £170 per megawatt hour - or more than double the traditional method. Onshore wind farms cost an average £101 per megawatt hour.

Olympic Games

Citigroup's Peter Atherton said delivering on the overall target will require the current annual investment in infrastructure to triple to £25bn a year.

He added that, in context, that kind of money would be the equivalent of one and a third Crossrail projects every year, or two and a half Olympic Games, or two and a half times the entire budget of Nasa.

"In fact we could sort of say goodbye to windmills and launch our own Mars mission if we wanted to for the same amount of money," he said.

Offshore wind farm
Offshore is the government preference, but the most expensive

Energy Secretary Chris Huhne said that while government is worried about consumers and hikes in home heating bills, the reality is that energy companies need to make money in order to invest in new technologies and deliver on the over-reaching strategy.

"I am going to be on the side of the consumer, making sure that there is no excess profit in there. But obviously, they are not the Salvation Army, they have to make a respectable return in a free and competitive market."

The government has acknowledged that bills are likely to rise in the short term, but with more of the UK's energy needs met with renewable, domestic supply, bills should not be higher than they would have been had Britain's energy mix remained unchanged.

New government estimates on future fuel bills are expected this week, but the last figures it released - in July 2010 - pegged average household fuel bills in 2020 at £1,239 - or about £100 lower than they are today.

But that figure is heavily disputed, both by industry watchers and consumer groups.

Citigroup analysts think the average bill could be as much as 50% higher, or £2000, while consumer website uSwitch has suggested that bills could triple to as much as £3,202 by 2020.

Panorama: What's Fuelling Your Energy Bill? BBC One, Monday, 7 November at 20:30 GMT then available in the UK on the BBC iPlayer.



SEE ALSO
Clarification: What's Fuelling Your Energy Bill?
Tuesday, 31 January 2012, 17:51 GMT |  Panorama

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