Utility Week

UTILITY Week 11th April 2014

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18 | 11th - 17th April 2014 | UtilitY WEEK Special report Policy & Regulation L ast month Centrica chief executive Sam Laidlaw issued a stark warning on security of supply as Ofgem ordered a competition investigation into the energy sector. "We've already had five years of investment hiatus because of Electricity Mar- ket Reform," he said. "We'll then have a fur- ther two years of under-investment, and this is coming at a time when Britain's energy security is being seriously challenged." Not everybody was convinced: the Daily Mirror ran his picture on its front page, headlined "The Blackout Blackmailer". SSE's Alistair Phillips-Davies urged the industry not to "scaremonger". However, Laidlaw has a point. The Com- petition and Markets Authority will report in 18 months, just as electricity capacity mar- gins are set to fall to their lowest level this decade. The sector is under heavy political pressure to keep energy prices down, which will only intensify as we approach next year's general election. The Energy Act has been passed, but much of the detail depends on secondary legislation that is still being worked through. Amid all this uncertainty, who will invest in keeping the lights on? There is no doubt the market is getting tighter. Power stations are closing down faster than new generating sources are being built. Investment decisions are on hold as developers wait for the final details of the government's Electricity Market Reform – and for Brussels to give its seal of approval. The capacity margin was around 15 per cent at the beginning of the decade, a com- fortable buffer against unplanned outages or exceptional demand peaks. Ofgem, in its last capacity assessment in June, forecast a fall to just 4 per cent by winter 2015/16 (see 'The capacity squeeze', below). In the event of higher demand or lower supply, it could fall even lower, to 2 or 3 per cent. The worst case scenario presents a 1 in 4 chance of having to disconnect some customers. There are some signs that the situa- tion has deteriorated since June. Economic growth forecasts have risen, which tends to foreshadow an increase in energy demand. On the supply side, a hostile political atmos- phere, tough economics and policy U-turns have put a dampener on investment. Two coal-to-biomass conversions have fallen away: RWE shut down its converted 750MW Tilbury power station and Eggborough is set to close 2GW by 2016 aer failing to secure subsidies for a conversion programme. Sev- A tight spot? The impending capacity crunch is real, but how realistic is the threat of power cuts? Megan Darby assesses the state of the generation market and the threat to supply security. the capacity squeeze According to Ofgem's last assessment, published in June 2013, the capacity margin will drop to its lowest level in 2015/16. Under the Reference Scenario, it falls to 4 per cent. That means demand is expected to exceed supply for three hours a year, before intervention by the system operator (the loss of load expectation) – meeting the government's proposed security of supply standard. However, Ofgem warned that if demand stays flat, the margin could fall as low as 2 per cent, leading to a loss of load expectation of nine hours a year. In that case, the risk of National Grid having to start disconnecting some customers at some point in the course of the winter rises to 1 in 4. Economic growth forecasts have been revised upwards since Ofgem's assessment, increasing the likelihood of higher demand. Responding to Ofgem's assessment in October, the Department of Energy and Climate Change (Decc) took a more optimistic view. By adjusting some of the assumptions around peak electricity demand and the availability of power through interconnectors, the department came up with a more comfortable margin of 7 or 8 per cent. Since the document was published, Decc has confirmed plans to create a capacity market. Full document at: http://bit.ly/18W1DUF Key National Grid's Gone Green 2013 scenario Reference scenario 2013 Reference scenario 2012 Low supply sensitivity High demand sensitivity De-rated capacity margin (%) De-rated capacity margin 12% 10% 8% 6% 4% 2% 0% 2013/14 2014/15 20115/16 2016/17 Year 2017/18 2018/19

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