Warning of UK energy crisis in three years

RADICAL steps must be taken to safeguard UK power supplies and prevent growing numbers of people being hit with energy bills they cannot afford, a watchdog has warned.

Ofgem said failure to reform the energy system to free up the 200billion investment needed to secure future supplies might lead to power shortages after 2015.

Staying with the current market model was "not an option", it said, due to the unprecedented pressures of the financial crisis, environmental targets, dependency on imported gas and closure of ageing power stations.

In a report, the power watchdog said consumers would suffer unless urgent action was taken to free up investment in new power generation, such as renewables and nuclear energy.

Ofgem made five suggestions, which all involve moving away from privatised energy markets towards a system giving the government greater control.

The most radical proposal is the creation of a centralised energy buyer that would set the amount and type of new power-generation required.

Ofgem chief executive Alistair Buchanan said a failure to act would risk shortages after 2015, with customers footing the bill for costly short-term solutions.

"We do not advocate change lightly, but all the facts point to the need for reforms now to provide resilient supply security," he said.

He said that, without reform, there might be a "degree of crisis" in 2013 or 2014 and warned that the situation could then become "quite uncomfortable".

Ofgem warned previously that, under a worst-case scenario, household bills could jump by as much as 60 per cent by 2016 – which would see the average consumer paying almost 2,000 a year for gas and electricity.

The government will consider the report, published yesterday, in its proposals for energy to 2050, due at the time of the Budget. But Energy and Climate Change Secretary Ed Miliband said the government was "confident" of meeting energy supply needs, with its "low-carbon transition plan" delivering secure supplies until 2020. "However, for the longer term, Britain will need a more interventionist energy policy."

Andy Atkins, of Friends of the Earth, said the current system was failing the UK and consumers were being "ripped off".

Meanwhile, Scottish economist Professor Andrew Bain called on the Scottish Government to overturn its moratorium on new nuclear power stations.

He said: "I think it's a terrible mistake to rule out nuclear, because it's probably going to be the cheapest option. But we need a balanced portfolio, with coal, gas, renewables and some nuclear."

Radical proposals to meet challenges

Ofgem's proposed reforms:

1 The regulator's least radical proposal seeks to address the uncertainty over the prices that power generators will have to pay for emitting carbon in the future. Carbon prices dropped to record low levels after the failed Copenhagen climate summit, due to disappointment over emissions reduction targets.

A low carbon price means there is less money to be made from low-carbon technology.

Ofgem suggested establishing a minimum price for emitting carbon. This, it said would work best as part of a Europe-wide scheme, but "it may be necessary to consider a minimum GB carbon price".

However, the regulator warned this policy might not be enough to meet financing challenges and deliver secure supply.

2 If the first option is considered insufficient, Ofgem said additional action could involve imposing obligations on suppliers to force them to demonstrate plans to cope better with threats to supply.

National Grid would also be forced to take measures to improve security of supply.

However, Ofgem warned these measures also might not meet the financial challenges and achieve renewable energy goals.

3 The third proposal focuses on replacing the current incentive system for renewables with tenders for renewable generation. The tenders would offer investors a guaranteed return over a longer period, for example 20 years.

Ofgem said this would encourage investment in renewable energy by increasing certainty over the future revenues.

However, the regulator said even this package of reform may still fall short on financing and long-term climate aims.

4 The third proposal could be made more radical by putting all types of energy generation out to tender, from new power stations, to renewables, as well as new gas storage.

This would add even more investor security, Ofgem argued.

5 Ofgem's most radical suggestion was to set up a central energy buyer.

All future investment would be co-ordinated through a single entity, probably state regulated, which would determine the amount and type of energy needed and enter into long-term contracts with suppliers.

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