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Action is needed to secure future energy supplies, says Ofgem

Energy regulator Ofgem has urged politicians to act to overcome doubts about the long term security of energy supplies.

Ofgem said energy market reforms and up to £200bn of investment were vital to efforts to maintain energy supplies, lower costs to consumers and help progress towards climate change targets.

“Leaving the present system of market arrangements and other incentives unchanged is not an option.”

Alistair Buchanan , Ofgem

In its Project Discovery report published today − the result of a long term investigation into whether future security of supply can be delivered by the existing market arrangements − Ofgem said action was needed to deliver both security of supply and environmental objectives at affordable prices past the middle of the decade.

Prompt action also has the advantage of allowing time for a wider range of reforms to be considered, said the report.

The regulator put forward a wide range of options for further consultation, including improved market signals, obligations on suppliers and capacity tenders to give greater confidence to help meet our carbon targets. Other options also include more structural reform ranging from a centralised renewables market through to a central buyer of energy.

The global financial crisis, tough EU emissions targets, increasing dependency on gas imports and the closure of ageing power stations have caused reasonable doubt over whether current energy arrangements can continue to deliver secure and sustainable energy supplies, Ofgem said.

Window of opportunity

Ofgem chief executive Alistair Buchanan said Britain is facing a window of opportunity to act. “We do not advocate change lightly, but all the facts point to the need for reforms now to provide resilient supply security,” he said. “Acting earlier will also help keep costs as low as possible for consumers and business.

“There is an increasing consensus that leaving the present system of market arrangements and other incentives unchanged is not an option.”

Ofgem has proposed a number of possible solutions. Targeted reforms could promote low carbon investment by reducing carbon price uncertainty through a minimum carbon price. Reducing uncertainty about the price of carbon would encourage investment in low carbon technologies, said Ofgem. Sharper signals in the gas and electricity wholesale markets could also encourage suppliers to ensure that they had more access to back-up supplies, especially at times of high demand.

Enhanced obligations could also be imposed to further improve security of supply by requiring suppliers and the system operator, National Grid, to demonstrate they have sufficient plans in place to cope better with threats to security of supply.

“All the facts point to the need for reforms now to provide resilient supply security.”

Alistair Buchanan , Ofgem

The Renewables Obligation could be replaced with tenders for renewable generation. The tenders would offer investors a guaranteed return, over say a 20 year period. This would again encourage investment in renewable energy by providing investors with increased certainty over the revenue they would earn, Ofgem said.

Capacity tenders for all forms of generation, including renewables, as well as gas storage and other gas infrastructure, could also provide greater confidence for delivering security of supply, by providing clearer long-term investment signals.

The most radical of Ofgem’s suggestions is a central energy buyer. This solution would involve co-ordinating all future investment through a single entity. While significant legal issues would need to be addressed it would see a central energy buyer determining the amount and type of new generation needed and enter into long-term energy contracts for power. It could also tender for new gas infrastructure.

Key issues identified by Ofgem

  1. There is a need for unprecedented levels of investment to be sustained over many years in difficult financial conditions and against a background of increased risk and uncertainty.
  2. The uncertainty in future carbon prices is likely to delay or deter investment in low carbon technology and lead to greater decarbonisation costs in the future.
  3. Short-term price signals at times of system stress do not fully reflect the value that customers place on supply security which may mean that the incentives are not strong enough to make additional peak energy supplies available and to invest in peaking capacity.
  4. Interdependence with international markets exposes the Britain to a range of additional risks that may undermine British security of supply.
  5. 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.

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