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Looking to the future of energy prices

At the moment there is a great deal of unknowns surrounding the future of energy in the UK. However, there is one exception, which the drive to reduce emissions must be centred on: Energy prices are rising, and will continue to rise for the foreseeable future.

In particular, electricity prices are going to increase, and more than gas will over the same period. The Department of Energy and Climate Change forecasted in September 2013 that electricity prices will rise from 15.2 p/kWh in 2013 to 21.7 p/kWh in 2030, whereas gas is forecasted to rise more modestly from 4.4 p/kWh to 5.2 p/kWh in 2030.

This is partly because there is considerable uncertainty on gas prices due to the success of fracking in the US, which has meant that liquefied natural gas is increasingly coming across to Europe. While the prospect of shale gas to the UK is enticing, we are not likely to see an impact on gas prices for many years. We don’t know how much gas there is and how much it will cost to extract. We do know it will cost more than the US and that with our current gas supplies running out, we’re still likely to be subject to international market prices regardless. Even the UK energy committee accepts we cannot at this stage prove with any certainty what the price impact might be.

Therefore, in spite of the government’s rhetoric, the underlying influence on fuel prices remains the price of fossil fuels. Again, this is especially the case for electricity due to the UK’s continued reliance on coal power, which is still the main generator of UK electricity. In fact, a third of all electricity generated in the third quarter of 2013 came from coal.

Carbon floor price

Green taxes, of course, do have an impact on price. The carbon floor price is probably the most significant of these as it will increase prices over the next few years. It was introduced in April 2013 to encourage new wind farms and nuclear reactors, and this is already passing on £5 to typical household bills at the moment.

This will rise to £10 this year, and increase every year to 2020, when it will then cost potentially £50 per household. In his latest Autumn Statement the Chancellor declined to remove the tax despite pressure on “rolling back” green levies.

However, UK taxes are relatively modest when compared with Europe. For example, Italy’s post-tax electricity prices are over two times the amount paid by the UK. This dispels the argument that the UK should back down on decarbonising our power sector because the costs make the UK uncompetitive against others in Europe.

Therefore the certainty of continued energy price rises must act as the salient driver for energy efficiency measures. We need to specify and fit more energy efficient equipment – not just based on current trends but also for the future.

Mark Hurley is UK head of environment at WSP

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