U.K. household energy bills are set to rise, with the share of generating capacity from gas doubling as aging oil and coal-fired stations close, the regulator said.
About 10 percent of capacity will retire through April, forcing the U.K. to shift from coal and oil to gas, Ofgem Chief Executive Officer Alistair Buchanan said. Britain will have to raise the proportion of power it gets from gas to 60 percent over the next five years from 30 percent now, he said.
“Things are going to be very tight in three years’ time,” Buchanan said today on a conference call. “People have been asking me, ‘Well, where’s the new nuclear, where’s the new clean coal, where’s the new carbon capture?’ It’s not there, and it won’t be there this side of 2020,” he said.
Buchanan’s comments lend urgency to government efforts to push energy market changes through Parliament, boost household efficiency measures such as insulation and complete talks with Electricite de France SA on a price for new nuclear plants. The Energy Bill seeks to stimulate 110 billion pounds ($170 billion) of investment that the government estimates is needed to replace aging power stations and upgrade the electricity grid by 2020.
Iberdrola SA Chairman Ignacio Galan said last week the U.K. risks blackouts this decade if it doesn’t hurry through measures to spur a capacity market intended to pay generators to make plants available at times of peak demand. That’s a view backed by Lakis Athanasiou, an independent equity analyst in London.
“The government has destroyed the free market for new build capacity and there won’t be any new plants until there is a decision on the capacity mechanism,” he said. “If there’s a cold winter in continental Europe and low nuclear availability, there could be shortages as early as next winter.”
While blackouts and brownouts aren’t likely, the margin of reserve power will drop to below 5 percent in three years from 15 percent now, Buchanan said. That’s happening at a time when world markets for liquefied natural gas face growing demand and slower development of supply than anticipated, he said.
“We’re going to have to go shopping around the world for our gas, and there’s going to be a period when global LNG is going to be quite tight,” Buchanan said. “It’s horrendous serendipity that just at the time we have a squeeze on our power station capacity and turn to gas, the global markets may have a squeeze on their LNG.”
Buchanan didn’t blame government for the squeeze, saying the financial crisis had “walloped” the country after it had already decided to close aging coal and oil-fired plants for environmental reasons, and while it was pursuing new or untested technologies such as offshore wind power and new nuclear plants.
“The reforms we are introducing to the electricity market through the Energy Bill are aimed at plugging this gap in order to keep the lights on,” the Department of Energy and Climate Change said today in an e-mailed statement. “Around one-fifth of our aging power stations are due to close over the next decade, so as Ofgem highlights, we cannot afford to be complacent and may face a looming energy gap.”
Brian Potskowski, a power analyst at Bloomberg New Energy Finance, estimates about 5 gigawatts of capacity will shut by April. A similar level closed last year. While that has been expected since European Union emissions rules were enforced in 2008, shutdowns have accelerated as producers used up generating hours they were allocated by burning cheap coal to boost profit.
“While the removal of this capacity will cause the market to tighten, persistent weakness in power consumption along with the continued growth of renewables means that we do not have to fear power shortages this year,” Potskowski said by e-mail.
While renewables, especially wind, are doing “an orderly job,” it’s difficult to get to the 33 gigawatts of capacity the government is targeting by 2020, Buchanan said. “Gas shale is an interesting story, but it’s one for the 2020s and beyond.”