Select Committee on Trade and Industry Written Evidence


Memorandum by Ofgem

  The Office of Gas and Electricity Markets (Ofgem) welcomes the Committee's inquiry associated with the Government's Energy Review.

  Ofgem will be making a full submission to the Energy Review in April and we would welcome an opportunity to brief the Committee on our views and ideas at that time. In the meantime, we are pleased to summarise our position and to respond to the specific questions asked by the Committee in its present inquiry.

  Our principal objective is to protect the interests of present and future gas and electricity consumers, where appropriate by promoting effective competition. We also have important duties relating to sustainable development, security of supply and protecting vulnerable customers.

  Our approach of creating and sustaining competitive markets wherever appropriate, and effective regulation where necessary, for example with the monopoly pipeline and wires networks, has evolved significantly over the last two decades. Our approach to both markets and networks will continue to evolve to meet the new and different challenges we will face in the 21st century.

    —  Competitive and open markets have created the climate to attract substantial investment (£6 billion over the next three years) in new gas import pipelines, Liquefied Natural Gas (LNG) terminals and major new gas storage facilities to maintain gas supplies as North Sea production declines. These new facilities will deliver around 100 billion cubic metres (bcm)—capacity sufficient to meet 90% of present gas demand.

    —  The competitive electricity generation market has delivered £14 billion of investment in 31 GW of new plant since 1990 and maintained healthy margins of supply over demand to keep supplies secure. Significant new investment is being made to prolong the life of our coal-fired plant with 7 GW of plant announcing it will fit Flue Gas Desulphurisation (FGD) to allow the plant to continue to operate under new European rules on emissions from 2008—this will bring the total to 18 GW of the 29 GW of coal-fired power stations currently in operation. Over 11 GW of renewables are planned for 2010 and 7.5 GW of new gas plant has secured Section 36 consents and could be commissioned within three years as other plant retires. The present margin of available plant over demand is at 20%.

    —  Regulation has enabled substantial investment in energy networks with over £30 billion invested over the last two decades. These regulatory arrangements have been flexible in accommodating changing patterns of generation, for example enabling the £600 million upgrade to the Scottish transmission network to allow renewable generators access to the network and the market. Recent research by the Energy Savings Trust suggests that the networks are able to accommodate substantial volumes of microgeneration but we are ready to look at ways of providing further incentives for network operators if this proves necessary. The Electricity Distribution Price Contol which Ofgem set for the 2005-10 period included incentive schemes and new connection charging arrangements to facilitate the development of more localised distributed generation.

  Ofgem is now working to set the 2007-11 electricity transmission and gas transportation price controls. Here the companies are seeking approval for significant investment to renew ageing assets and to accommodate new energy supplies such as renewable generation connections and gas import facilities. For example some £6 billion is being sought for electricity transmission. We are proposing significant innovations to allow network customers to signal the need for new capacity and to provide the companies with more flexibility and stronger commercial incentives to respond to these signals from customer and build new network capacity quickly and efficiently.

  The context of the Government's Energy Review provides an important opportunity to consider future challenges and identify barriers to the delivery of reliable, secure and sustainable energy supplies. The European Commission has an important role to play in making European markets more transparent and competitive. UK energy prices are increasingly linked to prices on the continent as we begin to rely more on gas imports and given the important role of gas as a fuel for electricity generation. We have seconded staff to the Commission and continue to work closely with them on their major inquiry into the effectiveness of competition in European energy markets. We are encouraged by their recent report that highlighted the lack of effective competition and their commitment to take forward competition law cases later this year to tackle the problems preventing effective competition.

  The Committee's inquiry invites contributions in three key areas:

(i)   The particular considerations that should apply to nuclear new build

  We have not studied the commercial viability of nuclear energy in detail but have analysed a range of publicly available studies on the potential costs of new build. Based on the range of costs set out in these studies it is clear that nuclear could have a role to play in helping to meet the challenge of reducing our carbon emissions to tackle global warming. This will depend on the costs of nuclear relative to other emerging or established technologies such as renewables and carbon capture and storage for gas- and coal-fired generation.

  We are aware that there are barriers that could prevent private investment in new nuclear build or artificially raise the costs of new nuclear build. These issues could, if they are not tackled, distort investment decisions on new generation technologies to meet the carbon challenge. These relate primarily to the planning and safety licensing processes for new nuclear stations and the arrangements for handling nuclear waste and decommissioning nuclear power stations. We look forward, therefore, to the report of the Committee on Radioactive Waste Management (CoRWM) later this year. Tackling these barriers will allow investors properly to assess the attractiveness of new nuclear build against other technologies.

(ii)   The implications of increasing dependence on gas imports (Question 2 of the review)

  The £6 billion of investment that is being made to bring substantial new gas supplies to Britain will deliver diverse new supplies as the North Sea declines. We will be able to source gas from a range of countries and suppliers including: Norway, the Netherlands, Russia, Algeria, Trinidad and Tobago, Qatar and Oman. We will not be over-reliant on any single supplier, country or piece of infrastructure. The largest single piece of infrastructure connecting us to the Norwegian gas supplies will only supply about 12.5% of peak winter demand. The rapidly developing global market for LNG will also provide the UK with a flexible, reliable and diverse source of gas supplies and allow the market to deal with any major supply shocks.

  The market is also planning to invest in significant new gas storage capacity—if all the current projects are delivered UK storage capacity will double by 2010. This will provide further protection and flexibility to meet peak winter demands and to deal with any shocks to gas supplies. This winter has also shown the "virtual storage" that is provided by the ability of gas fired power stations to run on distillate fuels and for coal-fired generation to run at higher load factors when gas supplies are tight.

  Competitive and transparent market arrangements in Europe will be crucial in helping to ensure that supplies are delivered via these new import facilities.

(iii)   The capacity of microgeneration to meet a substantial proportion of UK electricity demand in the medium and long-term

  Microgeneration technologies, now either under development or becoming increasingly available commercially, will lead to more cases in which electricity is being produced in, and sometimes exported from, domestic and small business premises. Last year, we launched a consultation to consider whether the current regulatory arrangements created any barriers to the uptake of commercially viable microgeneration. We will conclude that process this year and will, where necessary, make changes to that framework where barriers exist. We are also setting up a regular forum for companies and organisations involved in microgeneration so that they can inform us of any new or emerging regulatory issues.

  As has already been signalled, the 2005 electricity distribution network price control made provision for the development of these technologies with Innovation Funding Incentives, Registered Powered Zones and connection charging.

  Ofgem administers a range of environmental schemes on behalf of Government. Our goal is to ensure that these operate efficiently and smoothly and that access to these schemes is open and effective such that these also contribute to the effective operation of the market.

  As we have previously indicated, Ofgem would be happy to provide further briefing on energy regulation. In particular, Ofgem has recently commissioned research reviewing the costs of generation technologies and considering scenarios for meeting carbon constraints within the UK energy sector. We will be using this research to inform our response to the Energy Review and we would be happy to share with you the results of this analysis, and our submission, in due course.

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