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Don't panic, but UK faces BLACKOUTS BY 2015

Spare electricity supply dwindling - Ofgem

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The UK risks energy shortages by 2015 or 2016, energy regulator Ofgem has predicted. The shortages will primarily be caused by EU environmental legislation forcing the early closure of coal and oil-fired power stations, it said.

Its first annual Capacity Assessment [93-page / 1.9MB PDF] projects that electricity margins, or the amount of spare generation capacity on the system, could fall from 14 per cent today to 4 per cent over the next three years. The figures are based on joint modelling by the regulator and the National Grid. Ofgem is required under the Energy Act to report annually to Parliament on the availability of electricity and gas for meeting the reasonable demands of consumers in the UK.

Energy Secretary Ed Davey said that the Government would "consider carefully the implications" of the report, and publish a formal response before the end of the year.

"Security of electricity supply is of critical importance to the health of the economy and the smooth functioning of our daily lives," he said. "That is why the Government is reforming the electricity market to deliver secure, clean and affordable electricity."

In 2009, Ofgem identified an "unprecedented combination" of the global financial crisis, tough environmental targets and the closure of ageing power stations in its Project Discovery Report. These factors, it said at the time, would increase the risk to consumers' energy supplies and could lead to higher bills. The Government's draft Energy Bill [307-page / 1.9MB PDF] is a means of addressing these issues and encouraging investment in new generation capacity, it said.

Energy law expert Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, said that the report's conclusions were not surprising.

"The report is very clear on the dangers ahead for the UK's electricity generation capacity, and reflects widely-held concerns within the energy industry," he said. "This is one of the reasons behind industry's frustration with the draft Energy Bill, the lack of detail in which has done little to provide the certainty required for investors to build new capacity."

Although the draft Energy Bill was published in May, a new Bill is expected this autumn following pre-legislative review by the Parliamentary Committee on Energy and Climate Change and further work with the Department of Energy and Climate Change (DECC). Hobday said that it "remained to be seen" whether this new Bill would change the Government's current approach, which has seen much of the detail of its flagship Electricity Market Reform programme slated as to follow in the form of secondary legislation, which will not likely be published until next year.

The EU's Large Combustion Plant Directive (LCPD) sets limits on the level of emissions combustion plants built after 1987 may legally produce. Plants built before this date may opt out of the requirements, but are restricted to 20,000 'running hours' between 2007 and 2015, by which time all such plants must be closed.

According to Ofgem, UK power stations which have opted out of the LCPD are using up their running hours faster than expected. Most of this plant will, it said in its report, come off the system well before the 2015 deadline.

The report also cites several "uncertainties" surrounding the regulator's 'Base Case' figures; including whether new gas-fired generation will be built over the next four years and whether power stations that have been 'mothballed', or taken out of operation, will return. There is also, Ofgem said, uncertainty as to the "level of demand" for electricity over the next four years as a result of "the uncertain economic outlook and the potential for demand reduction through efficiency measures". Its model assumes no net energy imports from Continental Europe while maintaining exports to Ireland.

"In general, we would expect increases in the level of interconnection to improve Britain's security of supply because of the benefits arising from being a part of a larger and more diverse electricity system," the report said. "At the same time, GB will be exposed to risks from the actions of players beyond the control of the GB market. With the potential for more interconnection, it will be important in future years to carefully consider developments and the level of security of supply in neighbouring Member States."

The model used by Ofgem and the National Grid also, the regulator's chief executive Alistair Buchanan said, takes into account the "intermittent nature" of wind generation and the fact that "conventional" plants may not be available at all times because of maintenance or break downs.

The Government's draft Energy Bill proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a 'capacity market' to ensure that consumers continue to benefit from reliable electricity supplies at an affordable cost.

The capacity market will enable the National Grid to purchase the total volume of generation capacity it requires through a central auction including all providers willing to offer capacity, whether in the form of generation or non-generation technologies. The market will also provide incentives for energy companies to invest in new capacity or keep existing capacity operational.

The Energy Secretary has also indicated his "strong support" for a new generation of gas power stations, intended to replace ageing coal capacity. Speaking to the Guardian newspaper last week, he said that a new combined cycle gas turbine to be built just outside of Manchester by Carrington Power Limited could be the first of 20 such facilities. However, he added that investment in new gas capacity would not come at the expense of investment in renewable energy or the Government's carbon reduction targets.

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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