- Publication date
- 19th December 2013
- Information type
- Policy area
Ofgem has today approved additional measures that will be available for National Grid to use to manage tighter electricity supplies from next winter.
In Ofgem’s 2013 electricity Capacity Assessment published this June, our analysis showed that electricity margins could tighten in 2015-2016 to between around 2 and 5 per cent, depending on the outlook for demand.
Therefore, Ofgem considers it prudent to provide National Grid with the option of extra tools to help it balance the system against tighter electricity supplies from winter 2014/15.
Ofgem Chief Executive, Andrew Wright, said: “Our latest assessment on security of electricity supplies published this summer showed that electricity margins are set to tighten more quickly than previously expected in the middle of the decade. This is mainly because older coal power stations will close sooner.
“Britain has one of the most reliable power systems in the world, but with margins tightening there can be no room for industry complacency on security of supply. Therefore we have approved these new tools to act as an extra insurance policy that is available for National Grid to protect consumers’ power supplies.”
Ofgem’s decision gives National Grid the ability to agree contracts with power stations to provide extra reserve power to balance the system in peak demand periods. Mothballed gas-fired plant and other generators would compete for these contracts.*
National Grid will also be allowed to develop a new demand side product. It will be able to offer businesses a new opportunity to reduce their electricity use during times of high demand (between 4 and 8 pm on weekday evenings in the winter) in return for a payment. The amount they would receive would be determined through a tender run by National Grid next year.
Ofgem’s decision today means that National Grid can make preparations to be able to begin tendering for the services from Spring 2014, so that they could be delivered from winter 2014-2015 onwards.
National Grid’s revenue for these new tools will be regulated by Ofgem. Ofgem will only allow National Grid to pass on any costs provided they are incurred in an efficient and economic manner. National Grid would need to demonstrate this at every stage of the process, from deciding how much to procure, the procurement process itself, and decisions on if and when it uses the products. National Grid estimates that the impact of the services on consumer bills would be less than £1 per year for households. If National Grid does not need to procure these services, there would be no cost to consumers.
Notes to editors
1. Ofgem’s Project Discovery report in 2009, which fed into DECC’s review of the electricity market, first identified the issue of tightening capacity margins in the mid-decade. It found 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.
2. *Any plant winning a contract would be required to be available on weekdays between 6am and 8pm from the beginning of November to the end of February. Also any winning plant would be held in reserve outside the electricity wholesale market. These plant would only be used by National Grid as a last resort when it needs more power and there is none available in the market.
3. For more information about Ofgem’s 2013 capacity assessment please our press release
4. Ofgem has today published initial proposals on the funding arrangements for the new balancing services. It can be found here our website.
5. The new measures which Ofgem has approved are not a substitute for the capacity market which Government is developing as part of its Electricity Market Reforms. They are also not a substitute for the reforms Ofgem is developing relating to the charges generators and suppliers face when they don’t generate, or buy enough electricity to meet their customers’ demand (electricity cash out reforms).
6. The new measures also do not address the challenges of creating incentives for the industry to invest in providing adequate security of supply. Instead, they provide an extra tool to assist National Grid in balancing the system to reduce the risk of disruptions to electricity supplies against a background of narrowing margins.
7. Ofgem is the Office of the Gas and Electricity Markets, which supports the Gas and Electricity Markets Authority, the regulator of the gas and electricity industries in Great Britain. The Authority’s functions are set out mainly in the Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000. In this note, the functions of the Authority under all the relevant Acts are, for simplicity, described as the functions of Ofgem.
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