Ofgem repeats ‘lights out’ warning  

London – Ofgem has repeated previously issued warnings about the security of the UK’s energy supplies. Calling for far reaching energy market reforms, the watchdog body said there was serious doubt over future supplies due to the combined effect of the global financial crisis, environmental targets, gas import dependency and the closure of ageing power stations.

The bleak assessment accompanied Ofgem’s Project Discovery report, which emphasied the need to act to deliver both security of supply and environmental objectives at affordable prices beyond the middle of this decade. Prompt action will ensure that consumers do not pay more than is necessary and also allows time for a wider range of reforms to be considered.

The report identified five key challenges to the UK’s current energy arrangements:

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 to make additional peak energy supplies available and to invest in peaking capacity are not strong enough.

4. Interdependence with international markets exposes GB to a range of additional risks that may undermine GB 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.

Ofgem suggested various solutions to these issues, including better market signaling, obligations on suppliers and capacity tenders to give greater confidence to help meet our carbon targets. Other options include more structural reform ranging from a centralised renewables market through to a central buyer of energy.

Britain has a window of opportunity to put in place far reaching reforms to meet the potential security of supply challenges we may face beyond the middle of this decade, said Ofgem chief executive, Alistair Buchanan. The facts, he added, point to the need for reforms now to provide resilient supply security and keep energy costs as low as possible.

“There is an increasing consensus that leaving the present system of market arrangements and other incentives unchanged is not an option, commented Buchanan. “Ofgem has therefore put forward a range of possible options to unlock the up to £200 billion of investment Britain may need. We are keen to work with Government to find the best way forward.

“Reform is needed because a combination of factors have come together including: the global financial crisis, significant world-wide demand for investment in energy, tough EU emissions targets, the closure of ageing power stations and an increasing dependency on gas imports. The outcome of Copenhagen, in terms of lower carbon prices, reinforces the climate of significant uncertainty just when an unprecedented level of investment is required.”