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Expensive green energy a ‘bad gamble’ as ministers slash gas price forecasts

Gas and electricity will be significantly cheaper this decade than previously thought, according to new official estimates that undermine the Government’s case for backing expensive green energy.

Burning gas for power is currently far cheaper than electricity from wind farms, which receive billions of pounds in subsidies from consumers.

But ministers have repeatedly argued that gas prices will keep on rising, eventually making green energy good value for money.

On Thursday however the Department of Energy and Climate Change released new forecasts slashing its power and gas price forecasts for later this decade by as much as 20 per cent.

The forecasts suggest that instead of rising dramatically, wholesale prices will instead remain nearer to current levels out to 2020.

If ministers are right it spells good news for consumers, potentially sparing a typical dual-fuel customer close to £100-a-year in further bill rises by 2020, experts said.

But it also means new nuclear plants and wind farms will remain comparatively more expensive for years to come, they warned.

Gas forecasts published last year suggested prices rising from 66.7p per therm in 2014 to 73.8p in 2020.

Thursday’s forecasts cut those to 55.8p this year – reflecting recent falls in wholesale prices – rising to just 60.3p in 2020.

Forecasts for 2018 were cut by some 20 per cent.

Peter Atherton, energy analyst at Liberum Capital, said that green energy was “always a hell of a gamble and now looks like an increasingly bad gamble”.

“Year after year [energy secretary] Ed Davey has been banging on that one of the core reasons [for backing green energy] is to protect ourselves against inevitably high and volatile fossil fuel prices. Now their own forecasts are saying fossil fuel prices are going to be very affordable,” he said.

John Feddersen, chief executive of Aurora Energy Research, said that – if the new forecasts were accurate – “people will have lower power bills as a consequence”. A typical household dual fuel bill could be 7pc lower in 2020 than had been feared, he estimated.

The Department of Energy and Climate Change’s previous forecasts suggested the market price for electricity would rise from about £56 per megawatt-hour in 2015-16 to £64 in 2020-21. Yesterday’s forecast cuts that to £51 in 2015-16, rising to less than £54 in 2020-21.

Ministers currently offer offshore wind farms guaranteed prices of close to £150 per megawatt-hour, with consumers subsidising the difference.

The Government has capped the total budget that can be spent on green energy subsidies at £7.6bn in 2020. However, the lower the wholesale power price, the more subsidy each wind farm or nuclear plant will need – meaning the subsidy budget won’t stretch to as many projects.

“If your wholesale power price declines, government expenditure increases. It means more expenditure on any given project, and as a consequence fewer projects under the fixed cap,” Mr Feddersen said.

A spokesman for the Department of Energy and Climate Change said that the price forecasts had been cut due to “a softening in market expectations of future gas prices since the previous projections published in 2013”.

He said there was forecast to be “downward pressure on global gas markets in the second half of this decade as large sources of liquefied natural gas supply are due to come online during this period”.

He denied that the forecast revision undermined the case for green energy.

“We have a legally binding target to reduce our carbon emissions by 80pc by 2050. It’s not possible to achieve that without a diverse energy mix that includes renewable sources like wind and solar, which work alongside new technologies like carbon capture and storage that ensure we can continue to use fossil fuels in a cleaner way,” he said.

“Home-grown energy produced by renewables is also not subject to volatile international events that disrupt global oil and gas markets and the transport networks that supports these fuels.”

Separately on Friday, Margaret Hodge, head of the commons Public Accounts Committee warned that consumers are being ripped off by “incompetent” ministers who have signed them up to pay billions of pounds too much for wind farms.

In a damning report the PAC accused ministers of failing to protect consumers’ interests when they handed out £16.6bn in subsidies to five offshore wind farms and three other green energy projects. There was no competition in the process an no mechanism to claw back excessive profits.

“We are being ripped off by incompetence in Government and a desire to make excess profits in the industry,” Mrs Hodge said.

Ed Davey, the energy secretary, said: “To keep the lights on in British homes and businesses we needed to move quickly to secure new capacity and give investors confidence – fast.”