Report highlights energy challenges

This was the warning of energy regulator Ofgem yesterday when it published a report highlighting challenges the privatised energy market will face as it attempts to meet electricity needs over the next decade.

Chris Lock, spokesman for Ofgem, said the energy regulator took the unprecedented step of suggesting more government interaction in the market because the private sector will not be able to solve the energy crisis alone.

There will need to be more than £200bn invested in the UK’s energy infrastructure over the next decade, he said, and those sorts of funds are hard to come by in a recession.

‘On top of that we need to make sure we meet the climate change targets,’ he added. ‘With those things coming together, we believe the market is not able to deliver based on the current arrangements.’

Ofgem has proposed a scale of countermeasures to the government beginning with increasing penalties on gas and electricity suppliers that do not meet customer demands.

Lock said Ofgem also supports intervening in the European Union Emissions Trading Scheme, which restricts the amount of emissions a company can produce by issuing a certain number credits. These credits can be sold to high-emitting companies, he added, at a price Ofgem considers far too cheap.  

The view was echoed by EDF Energy, which released a statement following the release of Ofgem’s report.

Vincent de Rivaz, EDF Energy chief executive, said: ‘We agree with Ofgem that uncertainty in future carbon prices risks delaying or deterring investment in low-carbon technology, and could lead to greater costs for decarbonisation in the long run.

‘We believe that a priority action should be to establish greater long-term clarity on the carbon price and we note Ofgem’s view that the UK could do this independently if necessary.’

Ofgem has also suggested a more extreme idea of a central energy buyer, which would dictate to UK energy suppliers the type of infrastructure that needs to be built.

Lock said this agency would, for example, propose storage facilities, renewable and conventional generators or LNG (liquefied natural gas) terminals to be built by companies. 

‘At the moment, with the privatised market structure the energy suppliers will decide to build energy infrastructure depending on what returns they think they can make,’ he added. ‘So they’ll be looking at the forward price of electricity and decide whether to build a power station. The central energy buyer would actually do away with that.’

The key difference in the UK’s future energy supply will be how it is generated. Currently, 35 per cent of the UK’s power is derived by coal-fired power plants. Many of these plants, however, are coming to end of life and their contribution to greenhouse emissions makes it an unpopular choice to replace them.

Most of the UK’s ageing nuclear power plants will be decommissioned by 2023 and even though the government has called for 10 new facilities to be constructed, the stations will not be operational until 2018.

The UK has a goal of meeting 20 per cent of electricity generated by renewables by 2020. Yet the task seems daunting considering the nation only attains 5.5 per cent of its energy that way now.

Lock said energy demand can be quickly met with gas-fired power stations, which are currently a significant contributor to the UK’s energy mix, because they are relatively cheap and simple to construct. Yet he warned gas should be considered as a short-term solution.

‘Over the next couple of years the gas supply scenario is actually going to be pretty good because we’re getting increased levels of imports and gas coming from the North Sea,’ he added, ‘but as our dependency climbs as we get closer to 2020, it could put us into a difficult situation if we rely so much on gas and have to import from countries that are little more politically unstable then the ones we’re getting gas from now.’

Lock stressed Ofgem is ‘technology neutral’ and does not favour another type of generation over another. Its concern, Lock said, is that government acts now to make sure the supply of energy will be there in 2020 and properly managed. 

‘If you don’t intervene in the market now then it’s going to cost you more to do it at a later stage and that is going to have a more dramatic effect on customer bills,’ he added.