Households face paying hundreds of millions of pounds in extra levies on their energy bills, under new plans to ensure Britain has enough power plants to keep the lights on.
Amber Rudd, the energy secretary, unveiled plans to overhaul a crucial subsidy scheme that is designed to maintain secure electricity supplies, amid fears it was failing and could leave the UK at risk of blackouts.
The "capacity market" scheme is already due to run in winter 2018-19 and 2019-20, when energy firms will be paid almost £1 billion in subsidies each year to guarantee their coal, gas and nuclear power plants will be running.
The payments will be funded through levies on energy bills, adding about £10 a year to a typical household electricity bill.
The changes unveiled on Tuesday are expected to result in significantly higher subsidies being paid to a greater number of power plants in future years.
Analysts say the cost of the scheme could rise by at least 50 per cent and even double – potentially increasing the levy on household bills to £15 or £20 a year.
Amber Rudd, the energy secretary
The capacity market is intended to encourage companies to keep old power plants running and to build new gas-fired power stations.
But the scheme has been branded a failure because some energy companies are reneging on their deals and will not build or keep open the power stations they promised, which ministers have admitted is "putting our security of supply unacceptably at risk".
Under the plans, energy companies will now also be offered subsidies through the scheme from winter 2017-18, a year earlier than planned, instead of relying on increasingly costly emergency measures.
In a consultation, the Department of Energy and Climate Change (DECC) said: "We have seen several closures announced and other plant may be at risk. We therefore need decisive action now to ensure energy security."
There will also be increased penalties on power plants that pull out of contracts by failing to build new plants or shutting down old ones.
Separate policies will be developed by the Department of Environment, Food and Rural Affairs to try to stop highly-polluting diesel generators cashing in on the scheme, which was intended to deliver big new gas-fired power stations.
— DECC (@DECCgovuk)
March 1, 2016
However, the DECC said that the "overarching message" from industry and investors was that "the volume of capacity procured needs to rise and the clearing [subsidy] price needs to increase as a result in order to provide the appropriate incentives for the market to bring forward new gas capacity".
"We have reflected on these messages, and agree with them," it said.
The CBI welcomed the changes as "good news", while critics at environmental group WWF called it a "sticking plaster solution".
Lisa Nandy, Labour's shadow energy secretary, said: "This is a panicked response that will raise energy bills and deliver a windfall to some of the biggest energy companies.
"Ministers now need to come clean over how much energy bills will rise next year to pay for the consequence of their failure to get new power stations built."
So far subsidies awarded to power plants for winter 2018-19 and 2019-20 have been at prices of £19.40 and £18 per kilowatt (kW) of capacity, respectively.
Peter Atherton, an analyst at Jefferies, said the price was likely to need to rise to £35/kW to meet the Government's stated aim of securing new gas plants.
John Musk, of RBC Capital Markets, agreed it needed to be "much higher than £18/kW" and estimated it might be "in the high £20/kW range".
Iain Turner, of Exane BNP Paribas, said prices could even hit £55/kW, and that this could be enough to persuade some plants that had planned to close to remain open.
Ministers unveiled the plans after a spate of power plant closures. Photo: REUTERS
The DECC estimates that the scheme for 2018-19 will add £11 to a typical annual energy bill, and the scheme for 2019-20 will add £9.50.
A spokesman said it did not yet have estimates for how much the amended scheme would cost consumers but that the scheme was designed to prevent the kind of price spikes that might otherwise be seen if Britain's power supplies ran low.
Amber Rudd, the energy secretary, said: "Ensuring that our families and businesses have secure energy supplies they can rely on now and in the future is not negotiable and I’ll take no risks with this.
"The capacity market has driven down costs and secured energy at the lowest possible price for bill-payers, but I’m taking further action to tackle the legacy of under-investment and ensure our country’s long-term energy security.
"By buying more capacity earlier we will protect consumers and businesses from avoidable spikes in energy costs."
Lisa Nandy, Labour's shadow energy secretary