Today we have published our Capacity Assessment, our annual report to the Secretary of State for Energy and Climate Change assessing the outlook for electricity security of supply.
In our report, we highlight the importance of government reforms to encourage more investment in generation and note that, without action, risks to electricity supply could increase during the middle of this decade faster than expected.
The risk to electricity supplies is projected to increase from the current near zero levels, although we do not consider disruption to supplies is imminent or likely, providing the industry manages the problem effectively.
We also highlight the uncertainty around supply and demand for electricity. National Grid’s projections on power demand vary greatly depending on assumptions on economic activity and energy efficiency. There is also uncertainty over the timing and scale of plant closures and mothballing.
Electricity margins could tighten in 2015-2016 to between around two and five per cent depending on demand. This means that the probability of a supply disruption increases from one in 47 years now to around one in 12 years for 2015/16 or lower. If the projected decline in demand does not materialise margins could fall to two per cent.
We have been with the Department of Energy and Climate Change (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 agree that it is prudent to consider the case for additional tools to help National Grid balance the electricity network during the middle of this decade when capacity margins could be tight. These measures would give National Grid the option to buy extra demand-side response and reserve generation to balance the electricity network. Preventive action taken now will help protect consumer supplies.
Andrew Wright, Ofgem’s Chief Executive, said:
“Our latest report on electricity security of supply highlights the need for reform to encourage investment in generation. This is why we welcome 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.
“Our analysis indicates a faster than anticipated tightening of electricity margins toward the middle of this decade. We, 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.”
Our 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.