Radical Changes Proposed for U.K. Energy Market

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--Energy companies could be facing a much stricter trading environment in the U.K. if the country's energy regulator, Ofgem, follows through on a series of radical market proposals.

The regulator has voiced concerns that the U.K.'s energy supplies will be in crisis within five years because energy companies are not investing enough to safeguard supplies. As a result, Ofgem's Project Discovery report has proposed a radical shake-up that includes greater obligations on suppliers, the introduction of capacity tenders, replacing Renewables Obligation Certificates (ROCs) with longer-term obligations to encourage more renewable investment, and even the re-introduction of a central energy buyer.

Creating a new central energy buyer, something that was scrapped when the energy market was privatised, is the most drastic suggestion, as the move would take much of the power from current U.K. power giants such as Centrica plc (OTC:CPYYY) (Windsor, England); Scottish and Southern Energy plc (OTC:SSEZY) (Perth, Scotland); RWE npower (Swindon, England), part of energy giant RWE AG (OTC:RWEOY) (Essen, Germany); and EDF Energy (London, England), a subsidiary of French energy giant Electricite de France (EPA:EDF) (Paris, France).

Ofgem says that the "unprecedented combination" of the global financial crisis, tough environmental targets, increasing gas import dependency, and the closure of ageing power stations casts doubt on the ability of the current energy structure to guarantee supplies to 2015.

"Our evidence shows that Britain has a window of opportunity to put in place far-reaching reforms to meet the potential security of supply challenges we may face beyond the middle of this decade," said Ofgem Chief Executive Alistair Buchanan. "We do not advocate change lightly, but all the facts point to the need for reforms now to provide resilient supply security. Acting earlier will also help keep costs as low as possible for consumers and business.

"The overwhelming majority of responses to Ofgem's October consultation show that there is an increasing consensus that leaving the present system of market arrangements and other incentives unchanged is not an option. Ofgem has therefore put forward a range of possible options to unlock the up to £200 billion [$312 billion] of investment Britain may need. We are keen to work with Government to find the best way forward."

Ofgem proposes the introduction of a minimum carbon price to insulate investors in renewable energy projects from fluctuations in the price of carbon. ROCs would be replaced by an Enhanced Obligations package with tenders for renewable generation that would offer investors a guaranteed return over a 20-year period. There would also be capacity tenders introduced for all energy sectors to ensure greater security of supply.

Ofgem admitted that the possible re-introduction of a central energy buyer is the most sweeping of its proposals, where "significant legal issues would need to be addressed." If created, the buyer would coordinate all future investment, determining the amount and type of new generation needed and overseeing all long-term energy contracts for power. A central buyer could also tender for new gas infrastructure.

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Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project spending opportunity databases, market forecasts, high resolution maps, and daily industry news.