Household electricity bills could rise by a third, or by just under £200, by 2025 due to the increasing cost of green subsidies and wholesale prices, a new report has predicted.
Green policy costs will account for more than a quarter of electricity bills and wholesale costs will increase by 30 per cent during this time.
The data predicts electricity bills will reach an average of £807 over the next eight years because Ofgem will be forced to repeatedly increase its price cap, which is designed to protect consumers from bill hikes.
Rising costs: Green policy costs will make up more than a quarter of electricity bills by 2025
In the past three years, electricity bills have risen by an average of 2 per cent annually, and are now predicted to rise by a third by 2025, according to the report from Aurora Energy Research.
The price rise will be driven by the increasing cost of low carbon subsidies, wholesale costs, and payments to low carbon technologies are expected to double to £15billion per year by 2025.
The subsidies are designed to help move energy consumption from polluting fossil fuel sources, to cleaner more sustainable options. They should in time also drive down bills over the longer term.
Moving towards more sustainable options will also in time protect households from dramatic fluctuations in fossil fuels, which move in part due to geopolitics.
Some funding is also directed towards helping to insulate homes, helping to drive down bills and cut energy waste.
These price hike predictions come as two of the big six energy providers announced price hikes last week for households with a standard variable tariff.
British Gas confirmed a price hike of 5.5 per cent, or £60 a year, from May 29th while EDF then said prices would rise by 1.4 per cent, or £16 a year, from June 7 and the remaining big six providers are expected to follow suit.
Electricity bills to rise to £807 by 2025
The EDF rise was only to electricity bills and it said the increase, which will take average bills to £1,158 a year, reflected the hike in some of the fixed costs associated with supplying electricity.
The Government recently introduced a price cap for five million vulnerable energy customers to protect them from price hikes.
This was predicted to save those eligible for the cap an average of £115 per year from their energy bills.
But due to rising wholesale prices and the cost of green subsidies, Ofgem was forced to increase the cap at the start of April by £57.
Ofgem says those protected by the cap are still making savings and the cap is expected to be rolled out to all energy customers paying their provider’s standard variable tariff at some point this year.
The extension to cover the 11 million people on these tariffs was introduced after it was found those with one were overpaying each year.
The two-year investigation by the Competitions and Markets Authority found that collectively households with a standard variable tariff were overpaying by £1.4billion per year.
Yet the report today says: ‘under the price cap model, Ofgem will have little choice but to allow repeated increases in energy prices for the foreseeable future’.
A spokesperson from the Department for Business, Energy and Industrial Strategy said the price cap was designed to stop suppliers from charging customers too much and ensure that price increases are justified by underlying costs.
They also cited a recent report from the Committee on Climate Change which shows that green policies which help to make homes more energy efficient have more than offset the cost of energy policies and have resulted in lower energy bills.
The report says: ‘Since the Climate Change Act was passed in 2008, energy bills for the typical household have also fallen in real terms, as the benefits of improving energy efficiency have more than offset the increased cost of using renewable power generation, rising international gas prices and the increased number of electrical appliances in the home.’
Rising policy and wholesale energy costs will push bills up to £807 on average by 2025
The BEIS spokesperson commented: ‘The Government has put in place policies that have reduced energy bills for households, which have more than offset supporting our move to a low-carbon economy.
‘We are driving £6billion into making homes more energy efficient over the next ten years.
‘Five million vulnerable households already benefit from an energy cap and the Government’s new cap on standard tariffs will help another 11 million households and in designing it Ofgem will need to reflect underlying costs and so pass on savings when costs go down, while continuing to protect consumers from unfair energy prices.’
Bills have risen 2 per cent per year since 2015
An Ofgem spokesperson said: ‘We are working on the design of the price cap and have not made any final decisions at this stage.
‘Although we can’t speculate on future prices, a price cap on default tariffs will make sure these consumers are better off and only paying for a fair reflection of the costs of supplying energy.’
Claire Osborne, energy expert for uSwitch, added: ‘It’s a fact of life that gas and electricity prices rise as well as fall. We also need to invest in renewable energy in order to combat climate change, reduce our reliance on fossil fuels, and keep wholesale costs manageable in the longer term.
‘However, in the meantime that investment has to be paid for, and when wholesale and policy costs rise the people who suffer are households struggling to make ends meet. While price controls might sound like a silver bullet, in fact a cap might mean that households have to get used to price rises every six months – especially if costs continue to rise as predicted.
‘And if energy companies are pricing up to the cap and offering less attractive deals, consumers will also struggle to find the cheaper fixed energy tariffs that offer protection from price rises at the moment.’