Heading for blackouts in 2015?

Guest Post

by economist Lisa Waters of Waters Wye Associates

Are we heading for a future of blackouts?

It is being widely reported that energy regulator Ofgem is forecasting that the electricity system margin is getting very tight. Looking at the difference between the forecast peak demand and the available generation capacity (known as the plant margin) Ofgem thinks the current surplus of 14% could go down to only 4% in 2015/16.

Why?

Well the key problem is that the older coal and oil plant must shut as a result of EU environmental legislation. There is also some older gas plant that is currently not used and may never return to service and nuclear plant due to shut before 2015. On top of that there is very little new build going on. The government is trying to overcome the new build issues with its Electricity Market Reform (EMR) exercise, but will that do the trick? At the current time building any capital intensive project is very difficult for a variety of reasons; the big utilities actually generally do not have much cash; the regulatory environment is so uncertain that those with cash will not risk it; there is no forwarded traded energy against which to value a power plant; and even the support for renewable power is now unclear. It is therefore likely that many will agree with Ofgem that the general direction of travel is not good.

What next?

Well EMR is due to deliver a “capacity mechanism” where customers will pay generators for having plants available. The exact design of that mechanism is not due to be published by DECC until November. But what we do know is that the customers, who will pay for it, and the generators who may try to secure financing for new plant against it, will both need to take a good look at the detail before we know if it works. A capacity mechanism, to pay for plant on days it is not windy or demand goes very high, should be seen as an insurance policy. Extending that analogy, in an ideal world you would always have it bit would not want to have to claim against your insurance as the normal course of events. Sadly that is exactly the scenario that is now being built in the energy market an insurance policy being used to get by on a daily basis.