Future power options - and the risks

Britain's energy system could need a dramatic overhaul, according to regulator Ofgem

Britain's energy system could need a dramatic overhaul, according to regulator Ofgem. Here are its proposals for potential future power policy - and the risks that go with them:

Targeted Reforms

The least invasive of Ofgem's reform ideas, this involves setting a minimum carbon price to promote investment in low-carbon technologies. It said that while this would work best as part of a European-wide scheme, it may be necessary to consider Britain acting alone. Ofgem said better price signals in the gas and electricity wholesale markets would encourage suppliers to ensure that they had more access to back-up supplies, especially at times of high demand for energy.

But the regulator warned that this policy might not be enough to meet financing challenges and therefore to deliver secure supply.

Enhanced obligations

If the first option is considered insufficient, Ofgem said additional obligations could be imposed requiring suppliers to demonstrate plans to cope better with threats to supply.

Ofgem said this package of measures also might not meet the financial challenges ahead and achieve renewable energy goals.

Enhanced obligations and renewables tenders

This option would include the reforms set out above with the addition of tenders for renewable generation. The tenders would offer investors a guaranteed return over a longer period, for example 20 years. Ofgem said this would encourage investment in renewable energy by increasing certainty over the future revenues.

The regulator said this too might fall short on financing and long-term climate aims.

Capacity tenders

All energy suppliers bid for electricity - from all types of generation - via auction rather than by negotiated contract with the generators. Tendering for other facilities, such as contracts to build new gas storage facilities could also be introduced.

Ofgem said this package could expose customers to the risk of poor decisions on the type and scale of capacity needed. Small-scale projects could be overlooked.

Central energy buyer

Ofgem said if the capacity tenders were deemed to be insufficient, "the most radical of the five packages would be a central energy buyer". Costs would be passed on to the customer, so a potentially expensive measure, but the watchdog said this would be balanced by much greater security of supply.

All future investment would be coordinated through a single entity, which would determine the amount and type of energy needed and enter into long-term contracts with suppliers. The body could also tender for new gas infrastructure.

The regulator said this approach could leave customers exposed to poor decision-making and it might stifle innovation. European laws would also limit what could be achieved.

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