Watchdog warns price of power may soar too high for households

Ofgem said failure to reform the energy system could mean power shortages after 2015, while inaction would lead to a "degree of crisis" in three or four years.

It has predicted average household bills could jump as much as 25 per cent – to nearly 2,000 – without radical moves.

But the Government said it would be able to meet power needs in the years ahead, despite the watchdog's warnings of "reasonable doubt" over the security and sustainability of Britain's energy.

Ofgem said staying with the current market model was not an option as power supplies strain under the pressure of the financial crisis, environmental targets, dependency on imported gas and the closure of ageing power stations.

Ofgem chief executive Alistair Buchanan said without reform there could be a "degree of crisis" in 2013 or 2014 and warned the situation could then become "quite uncomfortable".

He said a failure to act would risk shortages after 2015 and mean customers would end up footing the bill for costly short-term solutions.

"We need to turn over all the stones with regard to the possible solutions that Government can address," he added.

The Government has indicated it will consider the report in its proposals for energy to 2050, due at the time of the Budget.

But Energy and Climate Change Secretary Ed Miliband said yesterday the Government was confident of meeting energy supply needs, with a low-carbon transition plan delivering secure supplies until 2020.

"However, for the longer term, Britain will need a more interventionist energy policy," he said.

Ian Parrett, of energy consultant Inenco, said Britain had left it too late to bridge the gap between older power stations going off-line and the emergence of new supplies "without making painful choices".

"We are left with a choice of meeting emissions targets or keeping the lights on," he said.

"Both domestic and industrial users will be hit hard by the failure to act with supply becoming a major problem and with ever-increasing energy bills over the next decade."

Ofgem has said 200bn of investment is needed in the next 20 years to ensure future supply, warning that even the least of its suggested policy measures would require "significant changes" and the most radical was a "dramatic move away from competitive markets".

Its most drastic suggestion would be to create a central energy buyer that would set the amount and type of new power generation required.

The Association of Electricity Producers said there was "a massive need for investment in new power stations", with around a quarter set to close down in the near future because they are old or do not meet environmental standards.

Chief executive David Porter said: "Make no mistake, the electricity industry wants to invest, but, in order to attract investment on that scale, we must have clear and stable policy, which investors have faith in."

Yesterday's document said: "The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements and that the competitiveness of industry and business is affected."

Mr Buchanan said an Ofgem survey found 77 per cent of consumers were concerned about future gas supplies.

He said this was probably because of arguments between Russia and Ukraine, Georgia and Belarus, which have caused concern about disrupted supply to the rest of Europe.