Ofgem warns that energy shortfall will push up bills

Ofgem has warned consumers that energy bills will rise in the immediate future due to an increased reliance on the volatile gas market.  

Alistair Buchanan, Chief Executive of energy regulator Ofgem, expects that the impending closure of around 10% of the UK’s generation capacity within the next month will lead to an over-reliance on imported energy.

Writing in the Telegraph, Buchanan explained: “If you can imagine a ride on a roller-coaster at a fairground, then this winter, we are at the top of the circuit and we head downhill – fast. Within three years, we will see the reserve margin of generation fall from about 14% to less than 5%. That is uncomfortably tight.

“So where will our new sources of power come from? Wind has also been hit by the financial crisis and it will take time to reach a critical mass; nuclear will not be with us until well after 2020; and carbon capture and storage technology is still in its infancy. So that leaves gas.

“Ofgem estimates that, by 2020, 60% to 70% of our generation may have to come from gas to fill the gap. That’s up from about 30% today. The government asked Ofgem to look at gas security of supply last year and we concluded that in all but the most extreme circumstances, supplies for domestic consumers should be secure. However, power stations and large industrial users may be affected in a squeeze. 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.”

Responding to Buchanan’s comments, a DECC spokesperson said: “Around one-fifth of our ageing power stations are due to close over the next decade, so as Ofgem highlights, we cannot afford to be complacent and may 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. 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 £110 billion of private sector investment in new clean power generation – in renewables, new gas, nuclear and Carbon Capture and Storage. Investing in a diverse energy mix will help us to insulate consumers from the high price of wholesale gas, which drives up bills.”

Buchanan’s comments will shine a more focused media spotlight on the looming energy gap and its impact on consumers’ energy bills. However, those operating in the renewable market will be disappointed that Ofgem makes no mention of alternative technologies other than wind. Leonie Greene, REA Head of External Affairs, commented: “Alistair Buchanan's warnings of a supply crunch must be heeded, but we'd like to hear more emphasis on the UK's legally binding renewable energy targets. The UK's Renewable Energy Action Plan anticipates delivering nearly a third of our electricity from renewable sources by 2020.  This should represent timely and cost-effective investment, given the natural retirement of large amounts of old energy infrastructure. The UK lags far behind both the European and World average for renewable energy production - and our poor performance on renewables is key to the national supply crunch we face. The tendency to downplay the importance of renewables is increasingly a UK characteristic that risks costing us dearly in the global clean energy race.

“Key to increasing deployment is simpler and more timely policy  It is also vital to secure the confidence of the industry and investors in the current Energy Bill.  The REA is currently pressing for vital measures to ensure the Energy Bill can be made to work for independent generators, who are vital to delivering the infrastructure we need. The priority for government must be to provide certainty for those technologies which are genuinely low carbon, cost-effective, and can be rapidly deployed before the capacity crunch hits. The only technologies which meet all three of these criteria are renewable, such as biomass, onshore wind, solar PV and waste-to-energy technologies. These need to be combined with intelligent energy efficiency and demand-side response measures, and sensible use of gas.”

Rising energy bills have consistently been identified as one of the most important financial concerns for the British public. In order to tackle the issue, government will be enforcing a limit of four electricity and gas tariffs each for energy companies.