Ofgem warns of Britain's energy vulnerability

Britain faces a serious risk of power shortages in the next 4 years because of ageing power plants and insufficient investment in green energy, warned the Office of Gas and Electricity Markets (Ofgem), the UK’s energy regulator, in a review of different energy scenarios.

Oct 13th, 2009

Uchenna Izundu
OGJ International Editor

LONDON, Oct. 13 -- Britain faces a serious risk of power shortages in the next 4 years because of ageing power plants and insufficient investment in green energy, warned the Office of Gas and Electricity Markets (Ofgem), the UK’s energy regulator, in a review of different energy scenarios.

The report stressed the country is in a vulnerable position with its energy requirements as North Sea production is maturing and the nation will be overreliant on gas in 2015 when coal-fired power stations are shuttered, 2 years before nuclear power stations are likely to be built. Ofgem officials are not confident renewable sources could satisfy demand alone.

Alistair Buchanan, Ofgem’s chief executive, said Britain is in the worst position regarding energy supply shocks compared with its European counterparts as it has not thoroughly tackled the problem. Germany and France, he added, are “way ahead of us” because they constructed new, lower-carbon power infrastructure.

He warned large industrial customers would need to curb their power demand so that households could have sufficient electricity in extreme scenarios like unusually harsh winter weather.

However, such an approach would put Britain at a competitive disadvantage, stressed the Energy Intensive Users Group representing some of Britain’s biggest manufacturers.

Jeremy Nicholson, director of the trade body, told OGJ that Ofgem’s conclusions are unsurprising. “We have raised our concerns with the regulator about this,” he said. The group fears manufacturers could have even larger increases in their energy bills than consumers, particularly as there would only be another 5 hr worth of gas storage capacity to be built over the next 2 years. Meanwhile, gas imports this winter are expected to reach record levels, according to grid operator National Grid PLC in its annual winter outlook on Britain's energy supplies. Currently Britain has only 16 days of gas storage whereas Germany and France hold 99 and 120 days of storage capacity, respectively.

Russian imports
Ofgem’s analysis echoed similar concerns raised in the earlier Wicks Report and research published by the Confederation of British Industry that the UK has a fragile relationship with Russia—a major exporter of gas to Europe—and that Asian markets are prepared to pay higher prices for LNG cargoes (OGJ Online, Aug. 18, 2009).

Last month, the independent think-tank Policy Exchange said in its report of Britain’s energy infrastructure challenges: “Put simply, there will be inadequate energy, transport, communications, and water networks, to the detriment of consumers and industry.”

In Ofgem’s report, around £200 billion is required to secure energy supplies over 10 years and address climate change objectives. The figure appears to be accepted by industry, but the major issue is whether consumers could cope with the green taxes and levies that will be required.

The good news from the regulator’s four energy scenarios is drops of 12-43% in carbon emissions from 2005 levels.

However, David Hunter, analyst at energy consultancy McKinnon & Clarke, told BBC Radio 4 that Ofgem’s conclusions are “a decade too late.” He blamed the government for not instilling confidence and a clear direction to privately owned energy companies to invest in the nation’s energy market.

“This has lead to ageing power stations not being replaced, a lackluster approach to developing new technologies such as carbon capture and clean coal, and poor gas storage facilities,” said Hunter. “The UK is not geared up to being an energy importer. Now with limited generation capabilities and only 3 weeks of gas storage capabilities, compared to Germany’s 4 months, Britain is in a very weak position when it comes to competing for energy on the global market. This has a direct impact on prices.”

Hunter called on the government to encourage private funding by “providing a clear energy strategy, including a weighting on the energy mix, and a commitment on providing these companies with a ‘reasonable return’ on their investment.”

Rising consumer bills
Ofgem’s analysis will increase pressure on the government to deliver a coherent energy policy that will attract billions of pounds in investment—particularly as consumers’ bills could rise by 60% in 2016 in the worst-case scenario. Ofgem’s Buchanan said this could be avoided through “massive reductions” in demand through energy savings. Operators previously complained of the difficulties in securing consent for major energy projects. With the economic downturn, raising capital is another problem.

Ofgem estimated prices could increase 14% by 2020 if there is early action on climate change targets and investment in clean energy sources. Earlier this summer, the forecast offered by the Department of Energy and Climate Change was just 8%.

Energy Secretary Ed Miliband said Britain could simultaneously balance climate change and energy security. "The most important thing about Ofgem's report…is that it emphasizes the need to, as we are doing, get on with new nuclear power, new renewables, including wind, which is unpopular with some people, and clean coal, and we're doing all of those things," he told BBC Radio 4.

He pointed out the government’s objective to have 40% of its energy from low-carbon sources by 2020. "Most of that is home-grown energy and that helps us to stabilize gas imports rather than just increasing them," said Miliband.

National Grid welcomed Ofgem’s report, adding that it is vital that energy policy helps industry to deliver through this energy revolution.

Chief Executive Steve Holliday said: “The key role Ofgem can play is to provide the framework that can allow the huge, but vital, investments to be made in the timescales needed.”

Some of its gas initiatives include applying its expertise in gas pipelines to carbon capture and storage to provide carbon dioxide transportation for generators. It is also working on the potential of domestic biogas to meet as much as half of British residential gas demand.

Ofgem will consult the industry as to how to overcome these challenges and will publish the suggestions next year. Responses to the consultation must be submitted by Nov. 20.

Contact Uchenna Izundu at uchennai@pennwell.com.

More in General Interest