Will the lights will stay on in the UK?

Reductions in high-carbon generation capacity in the United Kingdom raises power shortage concerns.

Ofgem’s first annual electricity capacity assessment report to the government has drawn attention to a high risk of a shortage of UK electricity capacity as early as 2015. In accordance with the EU large combustion plant directive (LCPD) 12 GW of coal and oil-fired capacity will come offline after reaching the allowed 20,000 hours of operation. In fact these coal plants have been operating for more hours than anticipated due to the relative cheapness of coal compared to gas, and, in theory, should close before the expected deadline of December 31, 2015. 

Ofgem’s chart shows the extent to which coal and oil capacity coming offline is expected to be replaced by gas, biomass and onshore wind. 

Contrary to alarmist reports of possible country-wide black outs Ofgem states that the capacity margin will simply be lower (14% to 4% in 2015/2016 in the base case). This means that the risk of some disconnections will be higher, up from near zero now, if demand happened to outstrip supply in the event of several factors happening at once. 

One of these factors is extreme winter weather: Ofgem’s estimated base case already assumes peak winter demand under normal winter weather. Another factor is if gas supplies from Norway completely dried up, say in the middle of winter, or if LNG imports were limited, or if an accident happened in one of the UK’s nuclear plants. Such things are clearly perilous to model, and Ofgem has sensibly refrained from quantifying some risks that would simply skew the results. 

That said, Ofgem’s estimates of capacity margins do acknowledge large uncertainty. The estimates consider sensitivities around mothballed gas fired plants coming back on line and imports from the continent. In a high scenario, the capacity margin would be about 9% in 2015/2016, however in a low case (full exports to the continent and no new gas builds or old gas plants in operation) the margin would be almost zero. So, if winter demand was unexpectedly high AND the price differential in Europe was such that the UK was exporting at full throttle to the continent, then some of the lights would go out. 

This is very unlikely in Ofgem’s estimates. In the base case scenario, the chance of disconnection of some customers is approximately 1 in 12 years. Even then, demand side measures (including disconnecting industrial customers first) would mean that there would be “little or no impact on (residential) customers”. 

While any blackouts are indeed very unlikely, what is more likely is a higher reliance on imported gas, which could translate into higher electricity prices. Although slightly more palatable than allowing Britons to walk around with candles, the policy response to the issues of securing and cost effectiveness will be keenly awaited in the upcoming Energy Bill.

Written by Yasmin Valji
Analyst in Datamonitor's Energy Team
Follow Yasmin on Twitter: @YasminV_DMEN

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