Houses of Parliament at night

Analysis: Averting the energy crisis

Mark Venables looks at the options for protecting the security of Britain's energy supplies.

UK Energy regulator Ofgem says far-reaching reforms are needed in Britain's gas and electricity markets to prevent power outages in the coming decade.

'Keeping the lights on' is a phrase that has been bandied about with great regularity in recent years, highlighted by high-profile power failures around the globe such as the outage in Brazil in November 2009 that left 70 million people in the dark for up to five hours. Without concerted and coordinated action, the big blackout could happen in the UK, too.

The gravity of the situation has at last been acknowledged by Ofgem. This month it published the conclusions of its Project Discovery investigation into market arrangements. The findings confirm the need to act to deliver both security of supply and environmental objectives at affordable prices beyond the middle of this decade. Five possible 'policy packages' are put forward for consultation.

Ofgem is effectively admitting that it, and the government, has lost a decade of energy planning. The country needs to find 200bn at least to invest in its energy infrastructure by 2020 to meet the UK's energy needs. There is a real danger of those lights actually going out by 2015 if action is not taken.

The report says that 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. As with most characteristically risk-averse some might say action-averse regulators, Ofgem does not advocate change lightly. However, all the facts point to the need for reforms now to provide resilient supply security. Acting earlier will also help keep costs as low as possible for consumers and business.

Reforms are needed because a combination of factors have come together, including the global financial crisis, significant worldwide 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 the recent COP15 summit in Copenhagen in terms of lower carbon prices reinforces the climate of uncertainty just when an unprecedented level of investment is required.

Ofgem chief executive Alistair Buchanan said that, without reform, there could be a 'degree of crisis' in 2013 or 2014 and warned the situation could then become 'quite uncomfortable'. He said a failure to act would risk shortages after 2015 and mean customers would end up footing the bill for costly short-term solutions. 'We need to turn over all the stones with regard to the possible solutions that the government can address,' he added.

But Energy and Climate Change Secretary Ed Miliband said the government was 'confident' of meeting energy supply needs, with its Low-Carbon Transition Plan delivering secure supplies until 2020. He continued: 'However, for the longer term, Britain will need a more interventionist energy policy.'

The five options for consultation include targeted reforms beginning with improved market signals, moving on to stronger obligations placed on suppliers. Additional measures might include introducing tenders for renewable generation, offering a guaranteed return over a longer period ' perhaps 20 years ' to encourage investment. If that was insufficient, capacity tenders for all forms of generation and for gas infrastructure would give clearer long-term investment signals.

The final option would be for all future investment to be coordinated through a single entity a central energy buyer which would determine the amount and type of generation needed and enter into long-term energy contracts for power. The body could also tender for new gas infrastructure.

For a number of years industry analysts have been calling for investment in nuclear and renewables generation, capacity payments to secure power station availability, and a reasonable floor on the carbon price, but the last option is widely seen as a step too far and even the regulator has conceded that a centralised renewables market might sound Stalinesque.

Responses to the proposals have been mixed. Nick Winser, National Grid's executive director for transmission, welcomed the report and said Britain was heading for an 'energy revolution', adding: 'The current market framework has served us well, but it makes simple common sense that it will have to change to meet the big challenges ahead.'

However, Ian Parrett of energy consultant Inenco warned that Britain had already left it too late to bridge the gap between older power stations going off-line and the emergence of new supplies 'without making painful choices'.

'We are left with a choice of meeting emissions targets or keeping the lights on,' he said. 'The fact is that both domestic and industrial users will be hit hard by the failure to act - with supply becoming a major problem and with ever-increasing energy bills over the next decade.'

The Association of Electricity Producers said there was 'a massive need for investment in new power stations', with around a quarter set to close down in the near future because they are old or do not meet environmental standards.

Chief executive David Porter said: 'Make no mistake, the electricity industry wants to invest, but, in order to attract investment on that scale, we must have clear and stable policy, which investors have faith in.'

Ofgem is stressing the importance of developing a coherent package, rather than implementing reforms in a piecemeal fashion. Much depends now on how the government reacts to the proposals.

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