Centrica warns carbon targets will push bills up further

British Gas's owner Centrica has warned that the Government's ambitious targets to cut carbon emissions mean that energy bills will continue to rise as the industry is forced to invest in cleaner, more expensive generation such as wind and nuclear.

"Looking at the long term, moving to a low carbon economy certainly means more expensive energy," said Nick Luff, Centrica's finance director. The prediction came as the country's biggest energy supplier sought to deflect public fury over a massive rise in profits that were unveiled just a month after it raised household gas and electricity prices by 15 per cent. Coinciding with the outcry, Ofgem, the energy regulator, announced an inquiry into the gas and electricity supply markets, the 15th inquiry launched in the past seven years.

The regulator said it launched the inquiry despite having "no clear evidence that the market is failing" but acknowledged the public perception of the market, controlled by six big suppliers who largely move in tandem when setting rates, was worrying.

Centrica argues that profits – which rose to £2.1bn from £130m the year before – are necessary to reinvest in new projects. Mr Luff pointed out that the company invested more than £1bn in new generation sources and gas fields last year, and plans to invest as much in every year through to 2010. Only a fifth of that figure was devoted to renewable energy sources last year, which was mainly into wind farms at Lynn and Inner Dowsing. These will come on stream later this year. Mr Luff said that the company would likely increase its commitment to renewable energy given the requirement, passed down recently by the European Commission, to increase renewable generation in the UK from 5 per cent to 40 per cent by 2020.

The Government's plan to increase wind energy generation from its current 1gw to 33gw by 2020 will require – by Centrica's estimate of £2bn for each gigawatt of wind power – an investment of £66bn. When taken with the Government's additional goal of building a generation of new nuclear power stations, a task which could cost another £20bn, and upgrading the gas and electricity grids, total investment in new power generation over the next 15 years could surpass £100bn.

The Government has done little to communicate the huge investment required, which will inevitably translate into much higher household energy bills.

Mr Luff said Centrica was talking with various partners about making equity investments in new nuclear projects, but declined to say with whom it would partner. The company is also in talks with national oil companies in Egypt, Norway, Nigeria and Trinidad over securing long-term gas supply contracts for period of 15 to 20 years that will alleviate its dwindling resources in the North Sea. Centrica produces 30 per cent of its own gas but buys the rest.

Nearly all of British Gas profits came in the first part of the year when the company lagged in dropping its retail prices after wholesale gas prices plummeted. It margins shrunk to 1 per cent as wholesale gas prices soared again, though as its residential business began to suffer, its upstream business performed better. That vertically integrated model that allows the company to benefit in either situation provides fodder for its critics who accuse the company of profiteering.