After the credit crunch comes the power crunch. Most of Britain’s aged coal and nuclear plants are scheduled to be decommissioned over the next decade and the lost capacity is not being replaced fast enough. Earlier this month, the country’s statutory energy markets regulator Ofgem released a report calling for fundamental market reforms to mitigate the pending ‘energy gap’.

 

By Tim Probert

Britain’s lamentable track record on energy policy gets worse. On 3 February, the Office for Gas and Electricity Markets (Ofgem), made the stunning admission that the liberalized market for which it is responsible had failed to deliver a secure power supply and proposed that the British government considers creating a state-controlled ‘energy buyer’ to ensure that it does.

A huge chunk, more than a third, of Britain’s installed power capacity is due to be lost by the end of the decade. Nine aged coal and oil fired are scheduled to be decommissioned by 2015 under the European Union’s Large Combustion Plant Directive, while all but three of Britain’s ten operational nuclear reactors are expected to close by 2018.

That lost capacity is not being replaced quickly enough and, as Ofgem warns, Britain now faces the very real prospect of being unable to meet peak demand post-2015. Indeed, the Department of Energy and Climate Change’s own figures forecast significant levels of ‘energy unserved’, i.e. blackouts, in 2017 and beyond.

In its report, Project Discovery, Ofgem proposes a number of solutions to encourage investment in new power stations. These range from setting a reserve price for carbon permit auctions to capacity tenders, and even creating a full-blown state-controlled utility, euphemistically labeled a ‘central energy buyer’, which would determine the amount and type of new generation needed and enter into long-term power purchase agreements with generators.

The British electricity market is one of the most liberalized in the world, so it is astonishing that Ofgem has suggested nationalization as a possible solution to failing energy policy.

So what’s gone wrong? Why isn’t the capacity being replaced? In the ten years from 1965, Britain’s Central Electricity Generating Board (CEGB) installed 28 GW of new power stations, mostly coal and nuclear plant. Between 1992 and 2004, 26 GW was added in the ‘dash for gas’ following privatization of the electricity industry in 1990.

Since then, several gigawatts of combined-cycle gas turbine (CCGT) capacity have been granted planning approval, but few projects have broken ground. Last month saw the first CCGT plant opened in the UK for six years. No coal plant has been built since the final units at Drax opened in 1986, while the last nuclear reactor, Sizewell B in Suffolk, was commissioned in 1995.

In 2001, the Labour government dissolved the CEGB’s pool trading system and, with guidance from Ofgem, introduced NETA (New Electricity Trading Arrangements) in an attempt to increase competition among power generators and drive down prices.

To this end, it was a success. No longer were generators the only bidders in the wholesale market – under NETA both generators and suppliers were able to trade via contracts and exchanges, meaning that retailers were able to get better prices.

Prices fell significantly, mainly due to the oversupply of gas generation and cheap gas. However, the discontinuation of the pool system’s capacity payments mechanism had the unfortunate side-effect of causing the mothballing of several plants and the postponement of construction of a number of new power stations which had received planning permission.

NETA was also a major factor in the near bankruptcy and subsequent nationalization of nuclear operator British Energy in 2004.Furthermore, due to consolidation in the sector, generators and retailers tend to be one and the same – Peter pays Paul for the same electricity in the wholesale market.

With this comfortable situation, what is now called the ‘Big Six’ – E.ON UK, EDF Energy, British Gas, RWE npower, Scottish & Southern Energy and Scottish Power – have little incentive to pass on lower wholesale prices to consumers nor to build new plant, except for renewables projects afforded generous public backing via the Renewables Obligation.

If it is accepted that the ultimate aim of energy policy is to ensure that there is enough capacity to meet demand, then it is difficult to avoid the conclusion that the replacement of the pool with NETA, with its absence of capacity payments, has been a failure. Under NETA, reserve margins have fallen, retail prices have soared and the ‘energy gap’ is obvious.

With an ultra-liberalized system like NETA, there are no incentives to increase supply by building new power plants, nor are there any sticks to punish generators’ failure to replace lost power capacity.

It is neither likely nor particularly desirable that Britain creates a state-controlled utility, but it is clear that the current market structure is no longer fit for purpose. NETA was created to increase efficiency in a flabby, over-supplied electricity market, but times have changed fundamentally.

Security/diversity of supply, decarbonization and long-term affordability will not be simply magicked into existence by a benevolent free market fairy. The uniquely British position of the past 30 years: that the best energy policy is to have no energy policy, and let the market take care of everything, is a myth that has itself been debunked by Ofgem.

Labour or Conservative, whoever is in charge of energy policy over the next decade will need to wield a bigger stick to ensure that the companies responsible for ‘keeping the lights on’ do just that. If not, the political repercussions will be very loud indeed.

 

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