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UK faces a “rollercoaster” energy market says Ofgem

Oilfield Technology,

Alistair Buchanan, the outgoing head of the UK’s energy regulator, Ofgem, has warned that the country faces escalating electricity prices and a dependency on imported gas for up to 60 – 70% of its electricity needs by 2020.

In a letter to the Daily Telegraph, Buchanan highlighted the fact that National Grid would find it increasingly difficult to meet the UK’s energy needs as older coal- and oil-fired power plants close: “On Wednesday January 16, due to unplanned outages and cold weather, National Grid had to find power to supply roughly a million homes to keep the lights on. Fawley, an oil-fired plant in Hampshire, was one of the power plants that responded. Next winter Fawley will not be there. Indeed, about 10% of our current generation stock goes next month as coal and oil-fired power stations close earlier than expected to meet environmental targets.”

According to Ofgem’s calculations, the UK will see its reserve margin of generation capacity fall from 14% to just 5% within three years. And with alternative sources of energy (wind, nuclear, clean coal, shale gas) not coming online quickly enough, the country will be left with little option but rely on gas – just as world gas demand is expected rise, gas supplies are expected to tighten in the short term, and UK domestic supplies fall by 25% by 2020.

“Britain, therefore, will have to compete for its gas on a worldwide market,” Buchanan said, where long-term contract prices are driven by Asia and are currently about 60% higher than UK gas prices.

Energy UK: this is an area of “very real concern”

Energy UK, a trade association, welcomed Buchanan’s comments as “highlighting an area of very real concern”. The association recommended “creating a mechanism that allows for steady phasing out of old plant as new technology comes on stream to maximise stability and give confidence to customers and to generators.

The Centre for Policy Studies (CPS), a conservative thinktank, also called for an “emergency power reserve” made up of older coal- and oil-fired power plants. It also highlighted the potential political impact: “For the first time since the 1970s, energy policy could influence the outcome of the next general election,” the CPS said in a statement.

“Politicians have kicked the energy can down the road for too long. That can is now going to blow up: households will end up paying the price in higher energy bills and maybe even energy outages. This was both predictable and unnecessary. We now urgently need a clear policy designed to meet the twin aims of lower energy costs and greater security of supply,” added Tim Knox, director of the CPS.


Buchanan’s tone did not please everyone, however. Claudia Mahn, an analyst with IHS Energy, called the regulator’s tone “alarmist” and made the point that new data from the Department of Energy and Climate Change shows UK energy demand to be at a 14 year low and not forecast to rise dramatically over the next five years. She also noted that: “tighter reserve margins […] are not an entirely unheard-of phenomenon”.

However, the politics implications of the issue were, Mahn agreed, potentially explosive. Average energy bills have increased by 159% since 2004, already causing an ”outcry from low-middle income groups struggling in the face of stagnating incomes and are increasingly becoming a distinctly political issue […] Going forward, the UK Government will thus have to solve the jigsaw of spurring needed investments of about £ 110 billion in new power generation capacity fast while not unduly burdening one consumer group over another and keeping the UK economy competitive.”

Written by Jonathan Rowland.

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