Consumers to pay extra £6 a year to revamp energy network

The cost of "rewiring" Britain's energy network could add an average £6 a year to consumers' dual fuel bills over the next decade, the industry regulator said today.

Ofgem said £32 billion worth of investment in pipes and wires was required across the country, twice that seen in the last 20 years, to secure supplies to households and to move to a low-carbon economy.

The watchdog said a hike in bills would support a revamping of Britain's "ageing networks", which were mostly built in the 1950s and 1960s.

Energy networks need replacing as demand increases and consumers change the way they use energy - such as charging electric cars overnight, Ofgem said.

Ofgem, the Office of the Gas and Electricity Markets, promotes competition in energy wholesale and supply markets and regulates them so there is adequate investment in the networks.

The regulator also revealed a new pricing model, which it said represented the "biggest change to the regulatory framework for 20 years".

The new model moves away from previous inflation-tied controls to an incentive-driven approach that rewards more efficient companies. Ofgem added that the proposals could save consumers up to £1 billion.

Ofgem chief executive Alistair Buchanan told the BBC Radio 4 Today programme the investment would be supported by a 6% increase on the current average household's total annual electricity and gas bill over the next decade.

He added: "It is going to be basically £6 a year over the next 10 years."

The warning followed a report from Ofgem last week which indicated that bills could increase as suppliers were seeing big rises in wholesale costs.

The watchdog expects wholesale prices to increase by 13% by next spring, which, if passed on in full, would see annual gas bills surge by around £81 to £706.

Ofgem's new pricing model, dubbed RIIO, will set pricing controls every eight years, rather than the current five-year period, and will offer incentives to efficient companies while clamping down on poorly performing firms.

Mr Buchanan said the RIIO model would "ensure investment but at a fair price for consumers" and would "financially penalise laggards" in the industry.

He added that the model would deliver the benefits of a green economy, such as more skilled jobs in areas such as solar energy installation.

A step-up in investment is required to meet new sources of energy generation, such as offshore and onshore windfarms and new nuclear power stations, Ofgem said.

The regulator said "smarter networks" were required to deal with more complex methods of supply such as energy recycling methods including combined heat and power generation.

The plans have been developed over the last two years and will be rolled out from the end of 2012, Ofgem added.

The watchdog has used the RPI measure of inflation as the benchmark for its pricing model for two decades.

Ofgem said more than £35 billion of investment was delivered under the RPI model, but Britain now faces an "investment hurdle" to replace its infrastructure.

Under new proposals, network companies will have their performance measured against how well they deliver customer satisfaction and safety.

The regulator also said it would expand its £500 million Low Carbon Networks Fund to cover all gas and electricity regulated networks.

The fund, which supports projects that try out new eco-friendly technology, previously only applied to distribution network operators, such as EDF Energy, Southern Electric and Western Power Distribution.