Electricity margins could tighten in 2015-16 to between around 2 to 5 per cent depending on demand, according to a new Ofgem report

Risk of mid-decade power 'capacity crunch' has risen

Power shortages look increasingly likely by the middle of the decade as electricity supplies tighten faster than expected.

Energy regulator Ofgem has said the danger of power shortages in the UK by the middle of the decade has increased, with its latest report warning electricity margins could tighten in 2015-16 to between around 2 to 5 per cent depending on demand.

Ofgem said the findings "illustrates the need for the timely implementation of the Department of Energy and Climate Change's (Decc) capacity market".

"The report shows that electricity supplies are set to tighten faster than previously expected in the middle of this decade,” said Ofgem.

"The risk to electricity supplies is projected to increase from the current near zero levels, although Ofgem does not consider disruption to supplies is imminent or likely, providing the industry manages the problem effectively."

Ofgem also highlighted uncertainty around supply and demand for electricity saying National Grid's projections on power demand varied greatly depending on assumptions on economic activity and energy efficiency, and there was also uncertainty over the timing and scale of plant closures and mothballing.

The regulator said it has been working with Decc and National Grid to explore options that would provide consumers with additional safeguards against the increased risk to mid-decade security of supply.

All three organisations agreed that it was "prudent" to consider the case for extra measures to help National Grid balance the electricity network during the middle of the decade when capacity margins could be tight.

Ofgem chief executive Andrew Wright says: "Ofgem's latest report on electricity security of supply highlights the need for reform to encourage investment in generation.

"This is why Ofgem welcomes Decc's commitment to introduce a capacity market that will provide a longer term solution to this problem at a time when Britain's energy industry is facing an unprecedented challenge to secure supplies.

"Ofgem's analysis indicates a faster than anticipated tightening of electricity margins toward the middle of this decade.

“Ofgem, together with Decc and National Grid, think it is prudent to consider giving National Grid additional tools now to procure electricity supplies to protect consumers as the margin between available supply and demand tightens in the mid-decade."

Ofgem's Project Discovery report in 2009 first identified the issue of tightening capacity margins in the middle of the decade, finding that Britain's energy industry faces an unprecedented challenge to secure supplies to consumers due to the global financial crisis, tough environmental targets, increasing gas import dependency and the closure of ageing power stations.

Dr Monica Giulietti, associate professor of Global Energy at Warwick Business School, who has studied UK energy prices for more than a decade believes it the UKs low capacity for storing gas that is most likely to cause problems.

"There have been warnings the gas reserves are getting tight in the UK as its storage capacity is a lot smaller than the rest of Europe. Plus there is also an issue with the decline in gas production from the North Sea,” she says.

“In February 2006 we saw a tightening of the gas supply in the Uk because of a fire at the Rough gas storage facility. The cold weather carried on into March, but there was not any rationing of supplies, only a substantial rise in price.

“I think that could happen again if the cold weather continues and similar conditions are observed in Europe; the wholesale gas price will rise and that will eventually be passed on to consumers.

“A change in demand will see the energy companies rely on the spot market and import gas, which is subject to variations in price. With such low reserves the UK might have to import more. The UK has just 13 days in reserve in the form of gas storage, while Germany has 99 and France 122; it is a big difference."

Energy Minister Michael Fallon told BBC 2's Newsnight yesterday: "I can assure you the lights are not going to go out."

He added: "The latest assessment has shown that the position is slightly worse than the previous assessment last year and they have got to make sure, the regulator Ofgem, has got to make sure, with all the tools at its disposal, bringing some mothball plants back in action, it has got to make sure that the lights stay on and they will."

A Department of Energy and Climate Change spokesman added: "If necessary, steps such as bringing mothballed plant back online will ensure we have enough power in the short term. Power is not going to be rationed and businesses are not going to be forced to switch off.

"A capacity market will ensure we have enough power in the longer term."

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