Will the lights stay on? Ofgem’s Dermot Nolan at the Economist UK energy conference
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National Grid has the right levers to help keep the lights on for householders.
This is the statement our CEO, Dermot Nolan, today put forward at the Economist UK Energy 2014 summit.
Dermot joined a panel of representatives from government, energy companies, campaigners, investors and think tanks, discussing the shape of the UK’s energy future.
Our remit is to support the interests of energy consumers, which includes assessing the future security and sustainability of GB’s energy supply. Here’s a snapshot of what he spoke about.
Will the lights stay on? A complex energy picture
The very fact that we are having a conference entitled “Will the lights stay on?” shows how we are all grappling with a more complex energy picture than we were 10 years ago, when we were self-sufficient in gas and before tough emission targets came into force.
Maintaining Britain’s high levels of security of supply has become far more challenging. Ofgem was one of the first organisations to point this out, in our 2009 Project Discovery. We showed that Britain faced a tough challenge in maintaining secure supplies, thanks to the unprecedented combination of the global financial crisis, tough environmental targets, increasing gas dependency and the closure of ageing power stations.
The report showed that up to 12 GW of old fossil fuel plant facilities would have to close by the end of 2015 to comply with European legislation for cleaner power stations. Around £110 billion of investment would be needed by 2020 to upgrade and replace energy infrastructure. In addition, more than £50 billion needs to be invested in upgrading power and gas networks up to 2021, so Britain can adapt to a low-carbon economy where smart meters, household power generation kits and electric vehicles are all becoming more common.
Since then, our own gas supplies have declined further, bills have increased and concerns over security of supply have increased. One easily understood indicator of secure supplies is the capacity margin. The capacity margin shows the surplus of electricity generation capacity compared with peak demand in the market. However, an early indication of our analysis shows that the risks for electricity supplies next winter are going to be very similar to last winter.
In the last year, two significant steps have been taken to manage the risks to electricity supply. In the short-term we are tackling this problem by approving new tools for National Grid to agree new contracts with power stations to provide extra reserve power when needed. National Grid will also carry out further tenders for large businesses to reduce electricity use at times of high demand, in exchange for a payment. These tools will give National Grid the ability to cope with the tighter margins and to reduce the risk of interruptions to customers’ supplies.
In the longer term, the government has also made major reforms to the wholesale electricity market to attract the investment we need. A carbon price floor will provide a stronger incentive to invest in low-carbon generation, and we’ll also see contracts for difference to support these generators. Also the Government’s capacity mechanism will help ensure there is enough generation to meet demand from 2018.
So to recap, Ofgem has played its role in identifying the issue of tightening margins and has worked closely with the Department of Energy and Climate Change and National Grid to ensure we now have the correct framework in place. While no system can ever give a 100 per cent guarantee, householders can be confident that National Grid has the right levers to help keep the lights on for householders. However there can never be any room for complacency: National Grid and the energy industry must be vigilant at all times.