Ofgem has identified the key issues requiring resolution in order to achieve security of energy supply in Great Britain and has proposed a series of packages to address these.
After considerable discussion and examination over the last year as part of Project Discovery, the Office of the Gas and Electricity Markets (Ofgem), the Government regulator for the electricity and downstream natural gas markets in Great Britain, has published its conclusions.
Key Issues Identified
Ofgem identified five current key issues which it believes require resolution in order to deliver “security of supply and environmental objectives at affordable prices beyond the middle of this decade”. The five key issues are as follows:
- The need to maintain, over several years, extraordinary levels of investment in challenging financial settings, against an environment of amplified risk and uncertainty
- The lack of confidence in future carbon prices being likely to delay and discourage investment in low carbon technology and leading to greater decarbonisation costs in the future
- Short-term price indications during periods of system stress not revealing fully the value that customers place on supply security which may result in weaker incentives to produce extra peak energy supplies and invest in capacity
- Interdependence with international markets making Great Britain vulnerable to a variety of increased risks that may attenuate its security of supply
- The higher cost of gas and electricity resulting in rising numbers of consumers being unable to afford sufficient levels of energy to meet their requirements and also affecting the competitiveness of industry and business
Rather than propose reform in a fragmentary manner, Ofgem highlighted the significance of implementing a comprehensive series of packages that would call for Government involvement.
The five packages proposed are distinguished by the intensity of reform involved as follows:
- Targeted Reforms: This package is intended to encourage low carbon investment by lowering carbon price uncertainty via a minimum carbon price while ameliorating market signals and promoting more demand-side response, thereby resulting in investment in low carbon technologies. A Europe-wide scheme would provide more favourable results. Should this be unachievable, however, it may be essential to contemplate a minimum GB carbon price.
- Enhanced Obligations: Should the Targeted Reforms package prove inadequate, the Enhanced Obligations package, in addition to the reforms within the Targeted Reforms package, could be contemplated. This would entail compelling suppliers to prove that they have prepared sufficient plans to handle threats to security of supply in a better way and placing obligations on the National Grid (system operator) to employ further measures to help improve security of supply.
- Enhanced Obligations and Renewables Tenders: This would incorporate the reforms in the Enhanced Obligations package and also replace the Renewables Obligation with tenders for renewable generation. The tenders would offer investors a guaranteed return over a long-term period. This package would seek to promote investment in renewable energy by offering investors increased certainty over the revenue they would earn.
- Capacity Tenders: This package would present sharper investment signals and, in order to produce greater confidence for delivering security of supply, would be for all forms of generation. Central Energy Buyer: This is the most radical of the five packages and would be considered if the Capacity Tenders package is concluded to be inadequate. A central buyer would ascertain the amount and type of new generation required and enter into long-term energy contracts for power.
For more information on the conclusions following from Ofgem’s Project Discovery, please see the following link:http://www.ofgem.gov.uk/Media/PressRel/Documents1/Ofgem%20-%20Discovery%20phase%20II%20Draft%20v15.pdf