Ofgem's chief executive has warned that energy prices could soar as demand outstrips supply

Ofgem head: energy supply on 'downhill rollercoaster'

Energy supplies are on a "rollercoaster" and heading "downhill fast", the head of Ofgem has warned.

Chief executive Alistair Buchanan issued the stark warning to consumers and businesses to prepare for higher prices as power plants close, foreign gas supplies shrink and increasing demand tightens the British energy market.

Writing in the Daily Telegraph, Buchanan said: "We have to face the likelihood that avoiding power shortages will also carry a price. If you can imagine a ride on a rollercoaster 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 reserve margin of generation fall from below 14 per cent to below 5 per cent. That is uncomfortably tight."

With many older coal and oil-fired power stations closing earlier than expected to meet environmental targets, about 10 per cent of current generation stock goes next month.

"Just when we need more gas, world demand for gas is set to tighten," said Buchanan.

Compounding factors include expected gas supplies from the Russian Shtokman field being cancelled, China's demand rising by 20 per cent a year and Asian gas costing 60 per cent more than UK supplies.

On the option of shale gas, the Ofgem chief said: "No-one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure it comes here."

Buchanan told the BBC: "There is no new nuclear, no new clean coal, no new carbon capture this side of 2020.

"So we will lean on gas, and gas will account for about 60 per cent of our power station needs instead of 30 per cent today, and in order to get hold of that gas we're going to have to go shopping round the world.

"Just at the time we're tight on power stations, the world is going to go tight on LNG (liquefied natural gas) gas prices, so you have got a double squeeze."

However, he said Ofgem would not let companies take advantage of consumers.

"What I think the consumers are really concerned about is that companies take advantage of rising prices and rising investment periods and line their own pockets," he said.

"We had a major set-to with the industry two years ago. I am very encouraged by what the industry is doing. They are paying their fines for behaving badly, they've stopped mis-selling, they are carrying forward a lot of retail market reforms.

"So, for the consumer the issue is 'Are the companies taking advantage of a high-price environment?'. And we will ensure they don't do that on behalf of consumers."

A spokesman for the Department of Energy and Climate Change said: "Our energy system faces significant challenges over coming years, including the closure of around one-fifth of our ageing power stations, so, as Ofgem highlights, we cannot afford to be complacent and may face a looming energy gap.

"The reforms we are making to the electricity market through the Energy Bill and through our Gas Generation Strategy 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.

"We are opening up the electricity market to incentivise a record £110bn of private sector investment in new clean power generation; in renewables, new gas, nuclear and carbon capture and storage.

"We can't put all our eggs in one basket, we need a diverse energy mix. This is the best solution to guard against high price of wholesale gas which drives up consumer bills."

But last week at a meeting of the Energy and Climate Change (ECC) Select Committee, energy industry experts said the government’s Gas Generation Strategy lacked detail and was not providing enough of an incentive to investors in gas-fired power stations.

Responding to Buchanan's comments, Angela Knight, chief executive of Energy UK, the industry's trade body, said the authorities should "get on with exploring the options for UK shale gas reserves to help energy security and focus on the affordability of energy to households and the competitiveness of British industry".

Opponents of tapping into shale gas reserves claim it causes pollution and earthquakes and does not offer a viable long-term solution to the country's energy needs.

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