London (Platts)--19Feb2013/659 am EST/1159 GMT

The UK's energy regulator has warned that electricity generation capacity will shrink by 10% in the next month and continue to tighten by the end of the decade, forcing reliance on gas-fired power generation to double amid rising global gas prices.

Ofgem chief executive Alistair Buchanan said Tuesday that power plant closures under the EU's Large Combustion Plant Directive will cause the UK's dependence on gas-fired power to rise to as much as 60-70% by 2020 from around 30% now.

"The big worry about gas for all consumers is what price will we have to pay to get it?" Buchanan wrote in a letter to the UK's Daily Telegraph newspaper.

"Because just when we need more gas, world demand for gas is set to rise while our own supplies are predicted to fall by another 25% by 2020," he wrote.

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In October 2012, Ofgem analysis forecast a tightening of electricity generation margins over the next four years, to just 4% by the winter of 2015-16 from 14% now due to earlier-than-expected LCPD closures.

The LCPD caps the running of hours of plants which opt out of emissions abatement measures to running time of 20,000 hours or until the end of 2015.

But coal-fired generation has increased dramatically over the past year, as generators look to take advantage of current low coal and carbon emissions costs, meaning that much UK's capacity will begin to significantly shrink from as soon as next month.

"If you can imagine a ride on a roller-coaster at a fairground, then this winter, we are at the top of the circuit and we head downhill -- fast," Buchanan said.

The UK's Department of Energy and Climate Change responded to Buchanan's comments saying that its electricity market reforms are aimed at plugging this gap to keep the lights on.

Although EMR intends to bring forward investment in low-carbon technology to help decarbonize the power sector, Buchanan said alternatives to gas would not be ready in time to meet the looming generation gap.

"Wind has also been hit by the financial crisis and it will take time to reach a critical mass; nuclear will not be with us until well after 2020; and carbon capture and storage technology is still in its infancy. So that leaves gas," he wrote.

Buchanan added that the UK's shale gas reserves would not meet the time frame of the capacity crunch or offer a cheaper alternative than what the UK currently pays for its winter gas.

An increased reliance on global gas poses strong concerns over security of supply as prices rise in line with increasing demand. Buchanan said the UK will be forced to compete for gas in the global market amid higher European gas demand due to nuclear plant closures and rapidly growth in Asian economies.

"The government asked Ofgem to look at gas security of supply last year and we concluded that in all but the most extreme circumstances, supplies for domestic consumers should be secure," Buchanan wrote.

"However, power stations and large industrial users may be affected in a squeeze," he added.

DECC added that is has legislated a "capacity market" to help guard against blackouts when generation margins become tight.

Buchanan, who is leaving Ofgem later this year, is due to deliver a lecture on the subject later Tuesday.

--Jillian Ambrose, jillian_ambrose@platts.com
--Edited by Jonathan Dart, jonathan_dart@platts.com

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