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Ofgem calls for radical shake-up to avert energy crisis

Peta Hodge
3rd February 2010
Ofgem today proposed far reaching energy market reforms – including a minimum carbon price and a central energy buyer – to attract the investment necessary to secure Britain’s energy supplies and help combat climate change beyond the middle of this decade.
According to the energy regulator, the unprecedented combination of global recession, tough environmental targets, increasing dependency on gas imports and the closure of aging power stations, has combined to cast “reasonable doubt” over the ability of current arrangements to deliver secure and sustainable energy supplies.

Following a period of consultation and analysis, Ofgem’s ‘Project Discovery’ report suggests that £200 billion may be needed to avert a crisis. 

But the energy regulator recognises that attracting investment – particularly into low carbon energy sources – is one of the sector’s most pressing problems.

According to Ofgem, the Copenhagen climate talks – which had the effect of lowering carbon prices – only served to reinforce “the climate of significant uncertainty just when an unprecedented level of investment is required”.

Ofgem’s report puts forward a range of options for tackling what the regulator sees as a looming energy crisis.

Minimum carbon price

These include targeted reforms, for example to promote low carbon investment by reducing carbon price uncertainty through a minimum carbon price – ideally as part of a European-wide scheme, but unilaterally if necessary.

Other options, requiring more structural reform, include the introduction of a centralised renewables market to provide clearer long-term investment signals.

Central energy buyer

The most radical of the options put forward by Ofgem is for central energy buyer. While significant legal issues would need to be addressed, this option has the potential to offer the greatest certainty for investors as it would see a central energy buyer determining the amount and type of new generation needed and entering into long-term energy contracts for power.  

“Our evidence shows that Britain has a window of opportunity to put in place far reaching reforms to meet the potential security of supply challenges we may face beyond the middle of this decade,” said Ofgem’s chief executive, Alistair Buchanan.

“We do not advocate change lightly, but all the facts point to the need for reforms now to provide resilient supply security. Acting earlier will also help keep costs as low as possible for consumers and business.” 

Responding to the report John Cridland, deputy director-general of the CBI, highlighted the very fine line that has to be trod to attract the “massive private-sector investment” needed to deliver a secure energy supply with lower carbon emissions and competitive prices.

“Future policy must take into account the benefits of a competitive market and also the need to give some certainty to investors who will be required to pay for new energy sources," he said.

Question mark over energy efficiency measures

The Ofgem report takes account of changes the Government has already announced – such as the roll-out of smart meters (which it anticipates will be broadly successful), energy efficiency measures, and feed-in tariffs for small scale renewables generation, the details for which were announced this week.

“What we say about energy efficiency measures – and feed-in tariff would be included in that – is that the extent to which they will be successful is unclear,” said an Ofgem spokesperson. Factors such as customer awareness and uptake, fossil fuel prices, and the strategies of energy suppliers and energy services companies are all likely to play a part.

Interventionist energy policy

While insisting that the Government has put in place a programme of action to deliver secure and increasingly low carbon energy supplies through to 2020, Energy and Climate Change Secretary Ed Miliband conceded today that, in the longer term, Britain will need a more interventionist energy policy. 

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Ofgem calls for radical shake-up to avert energy crisis
Ofgem has called for a minimum carbon price to attract investment into low carbon energy sources
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