Government asks energy regulator to look into security of gas supplies

The request came as the regulator, in conjunction with the Department for Energy and Climate Change (DECC), published its annual Security of Supply report. The report suggests that UK gas supply infrastructure is relatively resilient, but that challenges exist going into the future.

Ofgem also announced a draft policy decision to increase supplier incentives as a way of strengthening existing arrangements.

In the short term UK gas supplies are relatively secure and the wholesale gas market has a strong track record in attracting significant private investment, the regulator said. However, as the UK becomes more reliant on gas imports customers will be increasingly exposed to the global gas market for supplies.

Recent political instability in the Middle East and the impact of the explosion at Japan's Fukushima nuclear power plant earlier this year have helped push wholesale gas prices for the coming winter up by 40%, Ofgem chief executive Alistair Buchanan said.

Peak electricity demand over the next few years will likely remain relatively stable at around 60 gigawatts (GW) against a total UK generation capacity of 90.2GW, the annual report said. However, the UK will lose around 25% of its generation capacity over the next decade due to aging plant and more stringent environmental standards. In addition, an increasing amount of the country's power will be generated from intermittent sources such as wind.

Against this backdrop, gas is being seen as a flexible and reliable backup to renewables and nuclear power, said Energy Secretary Chris Huhne.

"Energy security is at the heart of our energy policy but we should never be complacent, and that's why I've asked Ofgem to look into whether further action is needed to ensure that medium to long-term gas supplies for consumers remain secure," he said.

Under the Energy Act Ofgem must report annually to Parliament on the availability of electricity and gas for meeting the reasonable demands of consumers in the UK. This report also fulfils the Government's own obligations to monitor gas and electricity security of supply issues and publish reports at an EU level.

Around 4.3GW of new gas plant that will connect to the National Grid is already being built while a further 8.7GW has planning permission. "It is important this new plant comes on as scheduled to avoid risks to security of supply," the report said.

Simon Hobday, an energy law specialist with Pinsent Masons, the law firm behind Out-Law.com, said that asking Ofgem to look into security of supply options was one of a number of options the Government was pursuing given the upcoming energy 'crunch'.

"Given the length of time it will take to implement any changes, the clock is ticking in terms of being able to make substantive alterations in time to prevent an energy squeeze," he said.

Last month the House of Commons Energy and Climate Change Committee warned that the Government should aim to double gas storage capacity by 2020 to minimise the UK's exposure to supply interruptions and price spikes. Current storage capacity amounted to only 14 days' worth of gas supply, it said.

The Government's White Paper on Energy Market Reform (EMR) (142-page / 1.8MB PDF) proposed the introduction of a 'capacity mechanism' designed to ensure that power stations are kept on standby to cope with emergency demand surges and the unreliability of some renewable electricity generation methods, such as wind power.

A technical update to the EMR White Paper is to be published at the turn of the year and will include a decision on how this Capacity Mechanism will work following a public consultation that closed in October.