Ofgem Highlights Importance of UK Government Reforms to Encourage Investment in Generation

UK energy regulator Ofgem has published its second report into electricity capacity, which illustrates the need for the timely implementation of the Department for Energy and Climate Change’s capacity market. The report shows that electricity supplies are set to tighten faster than previously expected in the middle of this decade.

The risk to electricity supplies is projected to increase from the current near zero levels, although Ofgem does not consider disruption to supplies is imminent or likely, providing the industry manages the problem effectively.

Ofgem also highlights the uncertainty around supply and demand for electricity. National Grid’s projections on power demand vary greatly depending on assumptions on economic activity and energy efficiency. There is also uncertainty over the timing and scale of plant closures and mothballing.

Electricity margins could tighten in 2015-2016 to between around 2 and 5 per cent depending on demand. This means that the probability of a supply disruption increases from 1 in 47 years now to around 1 in 12 years for 2015/16 or lower. If the projected decline in demand does not materialise margins could fall to 2 per cent.

Ofgem, DECC and National Grid have been working together to explore options that would provide consumers with additional safeguards against the increased risk to mid-decade security of supply. All three organisations agree that it is prudent to consider the case for additional tools to help National Grid balance the electricity network during the middle of this decade when capacity margins could be tight. These measures would give National Grid the option to buy extra demand-side response and reserve generation to balance the electricity network. Preventive action taken now will help protect consumer supplies.

Andrew Wright, Ofgem’s Chief Executive, says: “Ofgem’s latest report on electricity security of supply highlights the need for reform to encourage investment in generation. This is why Ofgem welcomes DECC’s commitment to introduce a capacity market that will provide a longer term solution to this problem at a time whenBritain’s energy industry is facing an unprecedented challenge to secure supplies.

“Ofgem’s analysis indicates a faster than anticipated tightening of electricity margins toward the middle of this decade. Ofgem, together with DECC and National Grid, think it is prudent to consider giving National Grid additional tools now to procure electricity supplies to protect consumers as the margin between available supply and demand tightens in the mid-decade.”

Ofgem’s Project Discovery report in 2009, which fed into DECC’s review of the electricity market, first identified the issue of tightening capacity margins in the mid-decade. It found thatBritain’s energy industry faces an unprecedented challenge to secure supplies to consumers due to the global financial crisis, tough environmental targets, increasing gas import dependency and the closure of ageing power stations.

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