There has been a lot of debate recently about the security of Britain's electricity supply, with many commentators arguing that this could now be under threat. As the Managing Director responsible for our existing power stations and for the development of new generation assets, this is an area I take a very close interest in.
This debate has been going on for some time. Ofgem published a report a couple of years ago which forecast that capacity margins (the difference between the capacity for generating electricity and the maximum possible demand) will be lower than in recent years. Historically the UK has had a margin of more than 10% - but Ofgem's forecasts are now saying margins could fall to less than 4% next year. That's not a big margin for error.
Margins are lower due to the impact of EU environmental legislation forcing the closure of some coal stations and poor market returns for new build plant. This means older plant is shutting and new plant is not coming on-line to plug the gap.
The UK Government, together with National Grid (as the System Operator) and Ofgem, has recognised these problems and developed two new tools for tackling them:
· a long term fix: the introduction of a Capacity Mechanism, which will begin in 2018/19; and
· a short term fix: through the Supplemental Balancing Reserve (SBR) which is due to begin this winter, 2014/15.
These tools are complicated, but if designed, introduced and implemented correctly, should resolve the issue. In an ideal world we would want the Capacity Mechanism introduced earlier, which would have removed the need for SBR – but ultimately the government decides the market design. This is how it should be, considering that government, together with the System Operator, has the best information about all the electricity generation within the market, the state of electricity infrastructure, and how much capacity will therefore be required.
The way these tools work is that the government, National Grid and Ofgem decide how much capacity is required to ensure security of supply, signals this to the market, and then procures the necessary capacity through a competitive auction/tender process. It is then for companies to compete with each other to deliver that capacity. This is where we come in and we will wholeheartedly support these initiatives.
Many commentators seem to think the companies decide the capacity margins. We don't. Our role is to be a responsible and prudent operator, ensure that our plant is available to generate as often as it can be, particularly when demand is highest. We take this role very seriously indeed, as illustrated by the £3.5bn investment we've made in the last five years to maintain and upgrade existing plant and provide the country with additional capacity. We work every day to keep our plant running as safely and cheaply as we possibly can.
In our opinion, the government and National Grid are taking the right powers and creating the right tools to address the issues. Now they need to get on with the implementation so companies can get investing.