Ofgem and National Grid open up about failures in UK energy market

Representatives of Ofgem, the gas and electricity market regulator, and National Grid, the UK’s electricity and gas infrastructure operator, have been discussing the implications of failures in the UK energy market with an incluential House of Lords committee this week. 

As part of the House of Lords Economic Affairs Committee inquiry into the economics of UK energy policy, representatives of the two bodies were questioned on 22 November 2016 to help the committee identify failures in the market, as well as revealing what sector experts feel must be done to prevent such failures going forward.

The public sector, working with the private sector, is faced with the daunting challenge of meeting projected energy demand over the coming years as well as meeting UK low carbon commitments, despite coal-fired power being set to halt in 2025 and ageing nuclear reactors being phased out without timely replacements.

The inquiry concentrated on renewable energy, technology, climate impacts and Ofgem’s chief executive faced questioning on the interaction between the UK and EU energy markets while National Grid’s director of system operations faced similar questions on the dependence of the UK on energy supplies from France and other countries. 

Discussions revealed two key questions facing the economic future of the UK energy market - the need to address the competitive nature of the UK energy market and the need to address this in light of the UK’s upcoming exit from the EU. 

While individual consumption was seen to fall in 2015 with measurable increases in energy efficiency of consumer appliances, by 2025 the demand for energy is predicted to potentially exceed supply by 40%. While there have been efficiencies made, Dermot Nolan chief executive of Ofgem, said: “Progress has been made on electricity, but less so on heat and transport.”

The answer to capacity and need had previously been found in the Dutch, French and Irish interconnectors which prevent current energy shortfalls, plus the upcoming Belgian and Icelandic connectors. Despite these being arranged through separate agreements with the nations involved, worries remain on the economic side as to what impact the UK’s changed relations with the EU will have on the role of interconnectors in the energy market.

For a market often seen as maintaining barriers to effective competition, there are strong concerns on the ramifications of fewer investments or new market entrants. Currently there are 12 domestic and 24 non-domestic suppliers claiming UK activity, with the six largest holding 95% of the energy market as of 2013. Of those six largest suppliers, four are owned and based in the EU, bringing yet more questions as to the economic ramifications of the future marketplace.

In this one thing was made quite clear, with Ofgem having previously raised concerns about the lack of or barriers to competition within the UK energy market, these concerns have grown when considering the ramifications of what will become the UK’s new relationship with the EU. 

Yet this was not the same for National Grid, as the EU question while important overall seemed less prevalent, with more focus being placed on inter-UK connectivity and diversity of energy generation types.

“One of the benefits of having the current system is diversity, having a real mix of generation types, at different levels spread throughout the country, providing security in its own way,” said Phil Sheppard, director of systems operations at National Grid.

Within this difference in priorities between the oral evidence given to the committee, the same strands of focus can be seen in the inquiry - namely competition, diversification, and Brexit. Diversification was the least controversial in the context of the current UK energy market.

As has been stressed throughout the Economic Affairs Committee’s inquiry, competition must be ensured in the UK energy market. While greater competition yields higher profit margins, it can also yield not just a benefit to consumers who are better able to match specific energy needs, but market diversification particularly in the type of energy used was said to strengthen the UK’s ability to satisfy energy needs in spite of specific energy fluxes, such as a gas shortage or lack of wind for power creation.

The committee will continue to take evidence this autumn prior to the findings being revealed in their spring report on the economics of the UK energy market.