Ofgem warning highlights need for new generation

Unless you’ve spent the last few months shivering under a blanket and resolutely refusing to switch on the heating, you will at some point have received a huge energy bill.

The bad but hardly unsurprising news is that things are probably going to get a lot worse.

Writing in yesterday’s Telegraph, Alistair Buchanan, chief executive of energy industry regulator Ofgem, warned that a desperate need to avoid energy shortages is likely to drive sharp increases in energy bills.

His comments build on analysis published last October by Ofgem, which showed that electricity margins – the amount of spare generation capacity on the system – are likely to fall from 14 per cent today, to four per cent by 2015/2016, a level that leaves the UK’s energy supply squeezed as never before.

Buchanan’s warning has  been widely reported in today’s newspapers. And many commentators have accused the regulator of rolling over for the power companies when it should be protecting consumers from excessive price rises.

With millions of UK households already said to be in fuel poverty (i.e. spending more than 10 per cent of their income on domestic heating)  it’s perhaps an understandable response. But in reality, Ofgem has little control over the economic, political and geological forces that are currently reshaping our energy landscape.

Increasing domestic demand, the imminent closure of a number of UK power plants (10 per cent of our energy stock will go just next month) and a longish wait before new generating capacity comes on stream will push up our reliance on imported gas at a time when global availability of gas looks set to tighten, partly as a result of much of the world turning its back on nuclear.

Indeed, with no new UK nuclear expected until well after 2020, wind power hit by the financial crisis, and other forms of renewable generation still in their infancy, Buchanan claims that up to 70 per cent of our generation may have to come from imported gas.

Responding to Buchanan’s comments, a Department of Energy and Climate Change (DECC) spokesperson agreed that we can’t afford to be complacent about our future energy supply, but claimed that reforms introduced through the energy bill will help guard against blackouts.

DECC confidently adds that its reforms will “incentivise”  £110bn of private sector investment in new energy generation. Although, given the apparently fragile investor confidence in the UK’s nuclear plans, its hard to be particularly confident about this claim.

For consumers, the coming decade will almost certainly be a period of spiralling fuel costs – an extremely worrying prospect for all of us, not least those of us already living in fuel poverty. 

Beyond that,  it seems, there are two possible outcomes. Either we act fast to develop the generating capacity that will keep the lights on and maybe even ultimately start bringing the costs down. Or we face the unpredictable and undesirable consequences of relying ever more heavily on foreign imports.