The price of ensuring the lights don't go out: £32bn

Britain's energy infrastructure needs £32bn of investment over the coming decade to meet the challenges of transition to a low-carbon economy, the sector's watchdog Ofgem said yesterday.

The estimate, published alongside proposals for a changed regulatory regime to help fund the upgrades, is equivalent to a 75 per cent increase in investment levels and is expected to add about £6 per year to household gas and electricity bills.

Not only are swathes of the UK's gas and electricity networks well out of date, with some parts going back to the 1950s. New types of generating capacity, and changing patterns of demand, also require so-called "smart grids" to manage supply in more flexible ways.

At the most basic level, wind farms commonly built either offshore or in Scotland require a re-think of the topography of a grid that currently focuses on existing large-scale coal and gas power stations. Domestic microgeneration similarly places very different requirements on the transmission network, as does the intermittency of wind generation. And as demand for electricity rises, with the development of electric cars, for example, the challenge will only become more acute.

The regulator's proposal is to update the existing "RPI-X" formula used to control energy prices for the past 20 years, with a new calculation (Revenue Incentives Innovation and Outputs, or "RIIO") from 2013. The scheme posits longer, eight-year pricing periods – compared with five years today – and also builds in a greater focus on customer satisfaction and incentives for efficiency and innovation. Competitive tendering for large-scale projects will boost performance and longer-term planning will draw investment at a lower-cost, Ofgem says.

The £32bn needed to upgrade Britain's pipes and wires is part of the £200bn Ofgem estimates needs to be spent on energy infrastructure to meet the 2020 climate change targets.