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UK drop towards electricity supply 'pinch point' accelerates

27 Jun 2013 22:28:47 | edem

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Electricity generation capacity in the UK is to tighten faster than previously expected through to the 2015/2016 "pinch point", British energy regulator Ofgem said on Thursday in its annual assessment of forward generation margins.

More than 2GW of installed capacity will withdrawal from the market in coming years, Ofgem said, which will combine with expectations of a further 1GW of plant being mothballed by 2016 on top of what has already been announced.

These factors will force the margin to tighten quicker than predicted in last year's assessment.

The withdrawal and mothball figures have only emerged over the past eight months, and as such were not factored into the 2012 report, when the pinch point was first revealed (see EDEM 5 October 2012).

The projection covers the de-rated capacity margin, which is the expected excess of available generation capacity to demand, expressed as a percentage.

According to the reference scenario, the de-rated capacity margin stands around 6% in 2013/2014, falling to 5% in 2014/2015, and shrinking to below 4% in 2015/2016.

'High' demand

The high-demand sensitivity points to a potential margin of less than 2%. But, rather than be based on an increase in consumption, the high demand scenario merely assumes flat year-on-year consumption, reflecting the weakness of electricity demand projections in the UK.

"This means that the probability of a supply disruption increases from 1 in 47 years now to around 1 in 12 years for 2015/2016 or lower," the report said.

"If the projected decline in demand does not materialise, margins could fall to 2%," the report continued.

Although the rate at which the margin will tighten is set to increase, a host of uncertainties remain, not least the shape of the demand curve, which traders indicated on Thursday would act as a restraint to positions being taken on the back of the report's findings.

Far-curve prices were pushed higher relative to the NBP wholesale gas market after last year's publication, which led to offers being lifted on longer-dated spark spreads (see EDEM 11 October 2012).

But one trader said that tightening margins had been priced in for some time and the accelerated tightening was not sufficient to stir the bulls. Observed bid-offer spreads on Thursday afternoon backed this, indicating a slight decline in far-curve values. Jamie Stewart

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