Are the Lights About to go Out in Britain?

Transmission Lines in Sunset

A report issued recently by the UK energy regulator Ofgem predicted that the UK may run short of electricity-generating capacity by the winter of 2015/16.  In this respect the UK is in good company, with power shortages being forecast or actually experienced this year in (to name a few) China, Japan, Pakistan, Israel and California.

In July more than 700 million people in India were left without power in the world’s worst blackout of recent times, with the country’s electricity supply unable to meet growing demand.

Clearly this is a global problem, and we should not forget that over 1.3 billion people in the world (mostly in sub-Saharan Africa and Asia) still lack access to electricity.

Afraid of the Dark

Fears of blackouts in the UK are not new (see for example my contribution to 2011’s ‘Scariest Risk’ feature on WillisWire).  The margin of generating capacity over expected demand has fallen from over 30% in 1990 to around 14% today, and those who have followed the curve downwards have been able to draw their own conclusions.

Ofgem now considers that the capacity margin could fall to only 4% within three years, largely as a result of the early closure of coal-fired plants and the impact of EU environmental legislation.

Responding to the Ofgem report, Angela Knight, chief executive of Energy UK, said: “We must secure over £150bn of investment in the UK to replace aging power stations and infrastructure, keep the lights on and meet our carbon targets. All while making sure that energy bills are affordable for the millions of homes and businesses that rely on the power supplied by our members.”

Quite how we reach this shangri-la is unclear.  One consequence of the privatisation of the UK electricity industry in the early 1990’s was that control over investment and pricing was taken out of government hands and left to the market—which, as a Conservative Member of Parliament in the 1990’s, Mrs Knight presumably supported.

It should therefore be down to the market to meet her call for investment and affordable prices, but there appears to be little economic incentive to do so.  A tight capacity margin is in the financial interests of the power producers, since it creates a seller’s market and a favourable pricing environment.

Climate Change Commitments

In mentioning carbon targets Mrs Knight was alluding to the 2008 Climate Change Act, which contains a legally binding commitment to reduce the country’s carbon emissions by 80% by 2050.  This means that new investment should be in ‘clean’ energy generation, which essentially means renewables or nuclear—neither of which is profitable without government subsidy.

One more problem to throw into the mix is that plans for a new generation of nuclear power stations to meet future UK demand are in some disarray, as two potential developers, E.ON and RWE, have now abandoned plans to build new reactors in the UK following the German government’s decision to close down its nuclear sector in the wake of last year’s Fukushima meltdown.

So there are challenges to be overcome if Ofgem’s worst case scenario is to be avoided. Followers of ‘Dilbert’ may be aware of creator Scott Adams’ Rule of Self-Defeating Prophecies, which states:Whenever humans notice a bad trend, they try to change it. The prediction of doom causes people to do things differently and avoid the doom. Any doom that can be predicted won’t happen.”

It remains to be seen whether this rule holds good for the UK’s electricity supply.

 

About David Reynolds

David is an Executive Director in Willis' Global Markets International in London, where he advises large national a…
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