It will also be able to pay businesses to reduce their electricity use in times of peak demand, under the new powers agreed by Ofwat today.
The new powers reflect Ofgem’s 2013 electricity Capacity Assessment, published this June, which shows that electricity margins could tighten in 2015-2016 to between around 2 and 5 per cent, depending on the outlook for demand. They come into force next winter.
Ofgem acting chief executive, Andrew Wright, said: “Our latest assessment on security of electricity supplies published this summer showed that electricity margins are set to tighten more quickly than previously expected in the middle of the decade. This is mainly because older coal power stations will close sooner.
“Britain has one of the most reliable power systems in the world, but with margins tightening there can be no room for industry complacency on security of supply. Therefore we have approved these new tools to act as an extra insurance policy that is available for National Grid to protect consumers’ power supplies.”
Ofgem’s decision gives National Grid the ability to agree contracts with power stations to provide extra reserve power to balance the system in peak demand periods. Mothballed gas-fired plant and other generators would compete for these contracts.
National Grid will also be allowed to offer businesses the opportunity to reduce their electricity use during times of high demand (between 4 and 8 pm on weekday evenings in the winter) in return for a payment. The amount they would receive would be determined through a tender run by National Grid next year.
Ofgem will begin tendering for these services next spring.
National Grid estimates that the impact of the services on consumer bills would be less than £1 per year for households. If National Grid does not need to procure these services, there would be no cost to consumers.