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Ofgem has published an analysis for the Department of Energy and Climate Change (DECC) that projects electricity margins, the amount of spare generation capacity on the system, will decline from 14 percent today to four percent by 2016.

Ofgem’s Project Discovery report acknowledges that the global financial crisis, tough environmental targets, and the closure of ageing power stations remain problems to overcome but says the UK government’s Energy Bill addresses these issues.

Edward Davey, Secretary of State for Energy and Climate Change says, “I am grateful to Ofgem for providing to Government their first annual Electricity Capacity Assessment. It provides a comprehensive analysis of the security outlook and Government will consider carefully the implications. We will respond formally before the end of the year. Security of electricity supply is of critical importance to the health of the economy and the smooth functioning of our daily lives. That is why the Government is reforming the electricity market to deliver secure, clean and affordable electricity.”

Ofgem’s chief executive Alistair Buchanan notes, “The unprecedented challenges facing Britain’s energy industry…to attract the investment to deliver secure, sustainable, and affordable energy supplies for consumers, still remain. Ofgem is working with Government on its plans to reform the electricity market to tackle these issues.”

Ofgem is also helping Britain attract nearly £30 billion of network investment thorough its RIIO price controls.

Buchanan adds: “Ofgem is also seeking sweeping reforms to the retail market to ensure a simpler, clearer and fairer energy market for consumers. This is vital as if consumers are going to be expected to pay for this investment, it is only right that they see a complete change in the way suppliers treat them. Encouragingly we are increasingly seeing evidence that suppliers have got the message and we will be publishing our next reforms proposals shortly.”

Responding to Ofgem’s report, E.ON UK chief executive Tony Cocker, says “We have been saying for some time that we need to see clarity on the Government’s electricity market reform (EMR) proposals and this report from Ofgem clearly shows that the capacity market must be introduced at the earliest opportunity. Yesterday at the Isle of Grain in Kent we, along with National Grid, opened a new heat pipe linking our two sites which is an excellent example of how through innovation and partnership we have created the most efficient gas CHP plant in the UK.”

Crocker adds that he hopes the UK Government “will soon provide clarity on the capacity market so we can continue to invest in the UK to maintain, improve and replace the existing energy infrastructure and ensure that we have an energy mix which is affordable, low carbon and secure for our homes and businesses. In addition, we will continue to offer our customers simple tariffs, fair prices and help in understanding and controlling their energy use, and cutting their energy waste.”

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