Ofgem eases UK winter electricity capacity margin fears

British energy regulator Ofgem expects electricity capacity margins for the upcoming winter to be less tight than in earlier forecasts, according to its latest capacity assessment published on Monday.

Ofgem’s estimated margin range for winter 2014/15 has increased to between 5%-10%, up from its 2013 assessment which put the range from 3%-7%.

Meanwhile, the regulator continues to stand by a worst case scenario of capacity margins tightening to 2% in Winter 2015/16, although the range has increased from 2%-5% in last year’s assessment to 2%-8% in this year’s.

The expected tightening of margins initially supported longer dated contracts on the wholesale electricity market, although much of this premium has dissipated over the past two years and the market has moved closer in line with the NBP natural gas hub, indicating a degree of cynicism was always present with regards to any threat to supply security actually materialising.

Ofgem has credited National Grid’s new balancing mechanisms for the upcoming winters as cutting the likelihood of “black-outs”.

The mechanisms have been designed to reduce system stress during peak delivery periods by contracting large power consumers to reduce consumption and mothballed power plants to fire up at short notice

But Ofgem chief executive Dermot Nolan remained cautious over the impact that the new balancing measures would have on increasing supply margins.

“This is good news for consumers and businesses and we are confident that National Grid has the right levers in place to manage the tighter electricity margins over the coming winters,” Nolan said.

 “However, no system anywhere in the world can give a one hundred per cent guarantee that the lights will stay on. Therefore given the tighter margins there can never be any room for complacency and National Grid and the industry must remain vigilant at all times.”

The assessments have also altered from last year because Ofgem has taken into account future supply side factors such as changes in available plant capacity as well as demand-side forecasts.

The revised assessments are based on National Grid’s forthcoming Future Energy Scenarios (FES), which will be published next month.

Ofgem has however added in a “sensitivity analysis” to mitigate the “high level of uncertainty around the supply and demand outlook for this period which is not fully captured by NG’s scenarios”.

Ofgem says its assessment’s sensitivity analysis “implies a wider range of risks’ than those based on the FES”.

This includes the assumption that peak demand will outturn 750MW higher than in National Grid’s most pessimistic scenario for all winters, representing the proportion of last winter’s drop in demand that has not been accounted for.

The assessment also works on the basis that there will be no increase in the UK’s interconnection capacity with mainland Europe and Ireland during this period, despite Ofgem acknowledging that projects under development could come online sooner than anticipated.

The 1GW ElecLink interconnector between the UK and France is scheduled to come online in late 2016.