Ofgem urges sweeping reforms for UK energy market

The UK energy regulator has proposed a series of radical measures to secure clean energy supplies and capture the £200bn in investment the sector needs over the next decade. These measures range from the UK setting a minimum price on carbon emissions independently of the EU to the more radical creation of a central buyer of energy - effectively nationalising the sector.

Ofgem, the UK regulator for electricity and natural gas, has unveiled a package of radical proposals designed to secure energy supplies and help Britain meet its clean energy targets over the next decade.

UK: £200bn to
overhaul energy
market

The reform packages are incremental but all demand increased government intervention in the UK energy market. The more radical of Ofgem’s proposals argue for the creation of a centralised renewable energy market and the creation of a central buyer of energy.

The latter would be a single government entity responsible for determining all investments needed in the sector – a move that could be seen as a form of nationalisation. All intend to increase regulatory certainty in a bid to attract the private sector investment required to overhaul the system.

Ofgem estimates the UK will need to capture £200 billion (€228 billion; $319 billion) in investment to meet increasing energy demand while, at the same time, fulfilling the European Union’s climate change goals. The current market system, Ofgem argues, has failed to stimulate the investment needed in the renewable sector. It also presents consumers with a potential 25 percent increase in their electricity bills over the next ten years to pay for the system’s overhaul.

EDF Energy chief executive Vincent de Rivaz told the Guardian that he agrees a change in the market is needed for the UK to meet its clean energy targets. David Porter, the head of Britain’s Association of Electricity Producers, argued in the same newspaper that the key to overhauling the sector is to “have clear and stable policy, which investors have faith in”.

A spokesman from utility Scottish and Southern Energy told Reuters “there is a need for some change – but it’s change that is evolutionary, not revolutionary”.

Proposals

Ofgem is proposing five levels of reform, each seeing increased government intervention in the market. Reform is necessary because the financial crisis, increased demand for energy investments, tough EU emission targets, greater dependency on foreign gas imports and the closing of several ageing power stations have come together to threaten the UK’s energy security, the regulator said.

The first of Ofgem’s proposals would see the UK determine a minimum price on carbon emissions to promote low-carbon investments and reduce carbon price uncertainty. This minimum price would preferably be part of a larger EU-wide initiative but, should that fail, the UK should set its minimum price independently of the EU to stimulate low-carbon technologies.

If that doesn’t provide satisfactory results, Ofgem argues, suppliers should be slapped with extra obligations, forcing them to demonstrate they have adequate plans to cope with threats to the security of energy supply. Next on the ladder would be steps to create a centralised renewables market. These would involve replacing the current renewable obligation (RO) system with renewable tenders and the implementation of capacity tenders.

Big reforms ahead for UK energy market
Source: Ofgem

The RO system gives renewable energy generators a clean energy certificate which they can then sell to traditional suppliers. The latter, in turn, are obligated to buy an ever increasing amount of these to meet the EU’s climate change goals, or pay a penalty.

But Ofgem has argued since 2007 that the system does not stimulate investment in new technology. It now wants to replace it with tenders for renewable generation that would offer investors a guaranteed return over a 20-year period.

Capacity tenders for all forms of energy generation, including renewable, gas storage and other gas-related infrastructure could also be implemented to strengthen the system. But if all this proves unsatisfactory, then Ofgem wants to create a central energy buyer. This single entity would co-ordinate all future investments in the sector, determine the amount and type of new generation needed and enter into long-term energy contracts for power.