Future of Energy

National Grid and Ofgem – their assessment of the energy market

Posted on 22 October 2019
By Ben Spry
Ben Spry
Head of Risk Management

Ben manages the operational delivery of our risk management services, including the award-winning Optimisation Desk and its new suite of Demand Side Response products.

With so much ongoing uncertainty on so many fronts, it can be useful to see what two major presences in the energy sector have to say about the market – and what the future holds.

Earlier this month, Ofgem published its ‘State of the Market’ analysis and National Grid its ‘Winter Outlook’ report.nWhat’s particularly interesting to note is the inclusion from Ofgem of what appears to be far more references to decarbonisation – and how, as the industry regulator, it can work to support the UK in achieving its ambitious targets.

Ofgem’s publication highlights how the UK has achieved significant reductions in greenhouse gas emissions, but notes progress started to slow in 2018. Transport and heat, in particular, are underlined as sectors with poor rates of decarbonisation. As these account for more than 40% of the UK’s total emissions, achieving “substantial reductions will be central to the UK continuing to meet its challenging carbon reduction targets”.

On the upside, the energy sector is making great strides – with a reduction of more than 50% emissions since 2012, and an 11% fall in emissions from electricity generation in 2018. Of course, this sector is supported by government policies that incentivise lower-carbon activity, with consumers footing the bill.

Ofgem estimates that the carbon price cost consumers around £31 for each tonne of carbon emissions avoided between 2010 and 2018 (with large business consumers paying more). Small-scale renewable subsidies, e.g. the Feed-in Tariff (FiT) have a far heftier bill – with consumers paying around £322 per tonne (and again, more for businesses). But alongside affordability and sustainability, security of supply remains a key concern for consumers – especially since the power cut that impacted more than a million back in August.

Ofgem notes that “the shifting demands of a system in transition are leading to new challenges around security of supply.” It also highlights the growing expense of balancing the UK’s energy system – costing £1.19 billion in 2018-19, which is the second-highest level ever (behind £1.21 billion in 2016-17).

Strangely, very little coverage is given to system balancing in National Grid’s Winter Outlook report. Although it does estimate that Triad avoidance is expected to deliver increased load reductions of 2.6GW this winter, up from 2.4GW in 2018/19. But the UK System Operator seems confident that it has “the tools and services we need to enable us to manage anticipated gas and electricity operability challenges across the winter period.”

It also reports that the margin on electricity is “greater than last winter”, and the gas supply margin is “sufficient”. What’s more, it anticipates “no additional adequacy or operability challenges for the coming winter as a result of the UK’s planned exit from the EU.” This is still the case if interconnector activity between the UK and continental Europe is halted (despite interconnector flows delivering an anticipated 2.7GW of power).

National Grid’s bullish mood is reflected in our own Winter Outlook report (see recent blog) – albeit with the inclusion of more of the wider market-influencing factors monitored by our Optimisation Desk team.

What Ofgem’s and National Grid’s publications both seem to reflect is a general upbeat assessment for the future – but with an acknowledgement of the many challenges that the current rapid pace of change will bring.

If you are concerned about how these changes will impact your business, our team of multi-disciplinary experts at Energy HQ can provide insight and advice.

To find out more, call us on 0800 193 6866 or send an email to nBS@npower.com (or if you’re an existing customer, contact your dedicated Client Lead).

To access Ofgem’s State of the Market report, click here, and National Grid’s Winter Outlook, here.

Comments

Your email address will not be published.