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Business Analysis & Features

Britain's energy consumers braced for an electric shock

Customers will pay even more on their bills as the power grid is set for a huge overhaul before a consumption surge, says Tom Bawden

After decades of calm, Britain's septuagenarian power grid is about to be transformed from a short, aging, fossil fuel hungry caveman to a tall, young sylph on a low-carbon diet. Ofgem yesterday approved £24.2bn of investment in the national grid of gas and electricity pipes and wires, some of which date back to before the Second World War, with the bulk laid in the 1950s and 1960s.

The investment, to be made between 2013 and 2021 and funded by the consumer, will be used to prepare Britain's power grid for a surge in electricity generated from solar, wind, nuclear, biomass and other non-fossil fuel sources, in the biggest overhaul since it was created through a series of regional network mergers in 1938.

"Ofgem's investment decision is the culmination of a number of years of investigations and consultations. It sets the scene for a sea-change in the way the energy grid is connected up as we move to low-carbon electricity," Angelos Anastasiou, an analyst at Seymour Pierce, said.

The investment will see the grid adapted to accommodate low-carbon sources of energy, which will be individually plugged into the system to replace the coal-fired stations due to close down because of old age and the need to satisfy European emissions targets. It will include an upgrade of the pipes and wires as well as an expansion of the grid to accommodate an expected surge in energy use and to cater for a rapidly changing power-generation map.

Traditionally, the coal-fired power stations that have dominated Britain's energy generation have been based in the North of England, while most of the consumption has been in the South. However, the growth of alternative sources of energy, such as wind power, will see far-flung parts of Scotland and Wales increasingly put on the map, while many of the northern coal plants close down.

"The UK's energy future will be more diverse with greater use of renewable energy being generated locally. The challenge for essential investment to keep the lights on and integrate these changes in the coming decades will be the biggest since the grid was built," says David Smith, the chief executive of Energy Networks Association, which represents the electricity and gas network operators.

The grid will also need to be adapted to enable more liquefied natural gas to be imported from Qatar and elsewhere as North Sea supplies dwindle. Although the Government has high hopes for shale gas, very little is known about the volume of extractable reserves contained in the UK, while any substantial production is not expected for years.

The overhaul will heap a little bit more pain on Britain's long-suffering customers, who are already reeling from an 8 per cent jump in household energy prices this year, which has pushed up the average annual direct debit bill to £1,247. They will finance it through an extra £12-a-year charge on the average household bill during the eight-year investment period, but will remain in line for one further dose of Ofgem-sanctioned pain.

This is because Ofgem's investment decision yesterday excludes so-called electricity distribution, the last part of the grid which links the houses to the network. And with a revolution set to take place in that part of the network, it is likely to require about £13bn of investment by 2050, but could potentially need as much as £61bn, according to research by ENA.

The overhaul is necessary to enable households to export home-generated solar and wind energy to the grid as well as import it when the wind isn't blowing and the sun's not shining.

Among a plethora of additional charges facing energy customers, UK households are also expected to pay an additional £95-a-year on their annual bills by 2020 to finance a key subsidy for low-carbon electricity generators. A total of 6.5 million households are now in fuel poverty, meaning they spend more than 10 per cent of their after-tax income on energy, while the number could jump to 9 million by 2016, the government-funded Fuel Poverty Advisory Group warned yesterday.

Ofgem is trying to ensure the grid receives the funding it desperately needs, while minimising the burden on customers. Lord Mogg, its chairman, said the regulator had "delivered a sound regulatory environment that protects consumers by attracting the energy infrastructure investment that Britain needs at a fair price".

Its announcement yesterday represents a rise from the £22bn Ofgem proposed in July. This was denounced by the country's biggest energy distributor, National Grid, which had asked for £31bn.

National Grid said it would spend a "few months" analysing the latest proposal before deciding whether to get the Competition Commission involved. But whatever the outcome, the national grid is in for an expensive overhaul and the consumer is going to pay.