Security of Supply
There is continuing concern about the reducing availability of electricity generation in the UK before nuclear comes on stream. There are a number of mutually reinforcing problems:
- Coal fired stations are being closed as a direct result of EU legislation - the Large Combustion Plant Directive - which was enacted in response to concerns about greenhouse gases and global warming.
- Cheap US shale gas has encouraged low cost US coal exports to rise very sharply, thus encouraging the use of coal for generation in the UK, thus rapidly using up the generating hours allocated to those coal plants which had been allowed to continue operating under the Large Combustion Plant Directive. They will therefore close faster than expected.
- Gas is at the same time becoming more expensive in Europe, following Japan and Germany's post-Fukushima switch from nuclear to gas. Gas stations are therefore being mothballed because they have become unprofitable.
- And new investment in power generation was probably deterred following Labour's price freeze announcement, and maybe also by the reference to the CMA.
The alarm was first raised by Ofgem in its 2010 Project Discovery report which concluded that:
- There was reasonable doubt over whether the current energy arrangements will deliver secure and sustainable energy supplies.
- Prompt action would reduce risk to energy supplies, help lower costs to consumers and help progress towards climate change targets
- There was a need for unprecedented levels of investment to be sustained over many years in difficult financial conditions and against a background of increased risk and uncertainty.
- The uncertainty in future carbon prices was likely to delay or deter investment in low carbon technology and lead to greater decarbonisation costs in the future.
- Short-term price signals at times of system stress do not fully reflect the value that customers place on supply security which may mean that the incentives to make additional peak energy supplies available and to invest in peaking capacity are not strong enough.
- Interdependence with international markets exposes GB to a range of additional risks that may undermine GB security of supply.
- The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements, and that the competitiveness of industry and business is affected.
The Government's subsequent dash for gas (and for nuclear) is described here.
Concern had increased even further by July 2015 when Ofgem warned that peak demand electricity supply margins could fall as low as 1.2% in the following winter, and maybe disappear altogether in 2016/17. Measures would be taken to ensure that lights stayed on, including paying big users to accept the risk of interruption in their supplies, but the situation was nevertheless both worrying and expensive.