Incentives for suppliers to invest in infrastructure are weak, says regulator.

The UK’s energy supply faces a perfect storm of problems after 2015, and
urgent action is needed to tackle the problems, according to a
report
published by Ofgem today.

The decline in indigenous gas reserves and the need to make demanding cuts in
carbon emission levels while renewing infrastructure are serious threats to
energy security, the regulator says.

"Our scenarios show supply to be relatively secure until around 2015," says
the Ofgem report. "However, significant action will be called for to deliver
both security of supply and environmental objectives at affordable prices longer
term, given the nature and scale of challenges facing the market."

Large parts of the ageing energy infrastructure will need replacement by 2020
at an estimated cost of £200bn as a substantial proportion of the UK’s fleet of
nuclear and coal power stations will be taken out of service over the next
decade.

But incentives to do so are weak thanks to bad credit conditions, a low
carbon price, interdependence with international markets and lack of consumer
pressure for supply security and investment in peak energy supplies.

Ofgem does not consider current arrangements adequate and recommends the
government examine various courses of action.

At the very least it recommends a minimum carbon price, improved price
signals and measures to promote demand-side response, which should improve
security of supply by increasing the incentives to make peak energy supplies
available.

More drastically it asks the government to consider legal obligations on
suppliers, a centralised renewables market and replacing the renewables
obligation with renewables tenders.

Its most radical suggestion is making a single entity responsible for
coordinating the procurement of new energy supplies.

The report points out that all have risks and benefits, and a combination of
measures is likely to be the best solution.

"More mandated outcomes could reduce the cost of finance, reduce the risk of
high prices resulting from under-investment, and remove some of the
inefficiencies in current mechanisms such as the Renewables Obligation," says
the report.

"However, such approaches may expose customers to risks of overinvestment,
and deprive them of some of the benefits of innovation and cost reductions
driven by more effective competitive markets."

Responding to the report, energy and climate change secretary Ed Miliband
today agreed that a more interventionist policy would be needed.

"The scale and upfront nature of the low carbon investment needed is likely
to require significant reform of our market arrangements to deliver security of
supply in the most affordable way," he said.

"That is why my department began work last summer to plot out the pathways to
a decarbonised, secure energy mix in 2050 and the options for reforming the
market to deliver it. Ofgem’s report will contribute to the proposals we will
make at the time of the Budget."

By: Tom Young, BusinessGreen