In the face of the unprecedented combination of the global financial crisis, tough environmental targets, increasing gas import dependency and the closure of ageing power stations, Ofgem says far reaching energy market reforms are needed.

In its Project Discovery conclusions, Ofgem found that security of energy supply and environmental objectives at affordable prices are needed beyond the middle of this decade.

Ofgem has put forward a wide range of options for further consultation, including improved energy market signals, obligations on energy suppliers and capacity tenders to give greater confidence to help meet the UK’s carbon targets. Other options include more structural reform ranging from a centralised renewable energy market through to a central buyer of energy.

Reform needed

Ofgem’s Chief Executive, Alistair Buchanan, says: “The overwhelming majority of responses to Ofgem’s October consultation show that there is an increasing consensus that leaving the present system of market arrangements and other incentives unchanged is not an option. Ofgem has therefore put forward a range of possible options to unlock the up to £200 billion of investment Britain may need. We are keen to work with Government to find the best way forward.”

Reform of energy markets is needed because a combination of factors have come together including: the global financial crisis, significant world-wide demand for investment in energy, tough EU emissions targets, the closure of ageing power stations and an increasing dependency on gas imports.

Ofgem has identified five key issues:

1. There is a need for unprecedented levels of investment to be sustained over many years in difficult financial conditions and against a background of increased risk and uncertainty;
2. The uncertainty in future carbon prices is likely to delay or deter investment in low-carbon technology and lead to greater decarbonisation costs in the future;
3. Short-term price signals at times of system stress do not fully reflect the value that customers place on supply security which may mean that the incentives to make additional peak energy supplies available and to invest in peaking capacity are not strong enough;
4. Interdependence with international markets exposes the UK to a range of additional risks that may undermine the UK's security of supply; and
5. The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements and that the competitiveness of industry and business is affected.