UK energy security "will carry a price" warns Ofgem chief

Out-Law News | 20 Feb 2013 | 10:14 am | 2 min. read

The UK will become increasingly dependent on expensive gas imports over the next few years and this will have an impact on energy bills, the outgoing chief executive of regulator Ofgem has said.

Writing in the Daily Telegraph ahead of an industry lecture, Alistair Buchanan said that the UK's energy reserves would become "uncomfortably tight" within three years due to the upcoming closure of coal and oil-fired power stations. The "reserve margin" of generation will fall from 14% to just 5% in this period, he said.

10% of the UK's current energy generation capacity will be taken offline next month to meet environmental targets, according to Buchanan. The regulator estimates that 60-70% of the UK's energy generation may need to come from gas to fill the gap by 2020, much of which will need to be imported.

"The big worry about gas for all consumers is what price will we have to pay to get it? Because just when we need more gas, world demand for gas is set to rise while our own supplies are predicted to fall by another 25% by 2020," Buchanan said.

"No one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure that it comes here. That is why the Government's reforms to the electricity market and its gas strategy are so important; not only to encourage diverse and sustainable sources of generation, but also to recognise the importance of gas in the near to medium term," he said.

The UK "may well be able to rely on renewables, clean coal and nuclear" further into the future, he said.

According to the UK Government's Gas Strategy, published at the end of last year, up to 26GW of additional gas generation capacity could be needed by 2030. One fifth of the UK's power generation capacity is set to be taken off line over the next decade, while an increasing amount of the country's power will be generated from intermittent sources such as wind.

Measures to encourage market certainty for gas market investors have formed an important part of the Government's electricity market reform (EMR) programme since the initial announcements, with the introduction of a capacity market to guarantee reliable energy supplies among them. This will enable the National Grid to purchase the total volume of generation capacity it requires through a central auction, including all providers willing to offer capacity, and to offer incentives for energy companies to invest in new capacity or keep existing capacity operational.

The Energy Bill, which is currently before Parliament, will allow the first auctions to take place from 2014. However, guaranteed capacity will not be expected to be made available until the winter of 2018-19. Additional powers included in the Energy Bill will enable the Government to intervene in the energy market if necessary to improve liquidity and encourage competition. It will also support Ofgem in its ongoing work looking at the case for market interventions to enhance gas supply security.

The Department for Energy and Climate Change agreed that the UK could not "afford to be complacent" and could "face a looming energy gap".

"The reforms we are introducing to the electricity market through the Energy Bill are aimed at plugging this gap in order to keep the lights on," a spokesperson said. "We have legislated to introduce a Capacity Market that will help guard against blackouts and ensure there is sufficient supply when margins get tight. Our reforms will incentivise a record £110bn of private sector investment in new clean power generation - in renewables, new gas, nuclear and carbon capture and storage."

The Government was also working to reduce the amount of energy wasted by incentivising energy efficiency measures for householders through its Green Deal programme, the spokesperson said.