The Government has been accused of getting its sums “spectacularly” wrong on the energy market and locking customers into excessive prices for years to come, in an independent review commissioned by ministers.
Professor Dieter Helm, who was asked in the summer to carry out the review, said prices had gone up for many households and businesses despite lower wholesale costs and greater efficiencies.
He also warned of a “cliff edge” for electricity capacity leading up to 2025 amid uncertainty about when the much-delayed new nuclear reactor at Hinkley comes online.
The report said that Government models of energy costs in the first half of the current decade had at times been “spectacularly bad”, as they predicted surging fossil fuel prices.
Instead, since 2014 the prices of oil, gas, coal and renewable energy had fallen significantly while new technology allowing greater scope for efficiency had become available.
“Yet in this period, households and industry have seen limited benefits from these cost reductions,” the report said.
“Prices have gone up, not down, for many customers.”
Prof Helm said customers had not benefited because of carbon pricing policies, regulation and the “exercise of market power” – in other words, lack of competition.
Image: There is uncertainty about when the new nuclear reactor at Hinkley comes online
The Oxford University expert added: “Many of these excessive costs are locked in for a decade or more, given the contractual and other legal commitments governments have made.”
That was because of the framework of agreements including contracts for difference guaranteeing energy prices for wind, solar, nuclear, and biomass projects.
Hinkley is one of those long-term agreements – and though the report did not come to any specific conclusions on the project, it did warn about the impact of the uncertainty surrounding its completion.
It said the UK faced a “cliff edge in capacity in the period through to 2025” as coal power stations close as well as most of the existing nuclear capacity.
“There are very real risks to security of supply, and a risk to the climate change agenda if, as a result, emergency measures are required to keep the coal stations available.”
It comes after the consortium behind Hinkley said in July that it faced a delay of up to 15 months.
The report said energy policy, regulation and market design were “not fit for the purposes of the emerging low-carbon energy market”.
It recommended a series of measures on how to reduce costs in electricity generation, transmission, distribution and supply.
The report also called for standard variable tariffs used by energy suppliers to be replaced by a default tariff based on costs and a published profit margin.
Capping this margin would meet the objectives of new laws planned by the Government to rein in excessive household bills, the report said.
The Government said it would consult with industry, businesses, academics and consumers on the review.
Business and Energy Secretary Greg Clark said: “We are already taking significant steps to upgrade our energy infrastructure as part of the industrial strategy and have published draft legislation to cap poor value energy tariffs helping millions of consumers across Britain.”