Lights out warning as SSE cuts its power generation

Embarrassment for Osborne after energy giant attacks Government's 'lack of clarity'

The danger of widespread power cuts in Britain mounted today when a leading energy producer warned it will reduce output by more than 15 per cent – enough electricity for 2 million people – over the next year.

SSE, the big-six energy provider, is cutting back or closing operations at five coal, gas and biomass-fired plants, including Ferrybridge in Yorkshire and Keadby in Lincolnshire, with the loss of 165 jobs. It blamed a new charge next month for emitting carbon, low profit margins and uncertainty around guaranteed payments to gas-fired power stations in the future.

In an embarrassment for George Osborne, who has placed gas power at the centre of his solution to Britain's looming energy crisis, SSE's chief executive, Ian Marchant, criticised the Government for giving a "lack of clarity" to investors and utilities looking to build new gas stations or extend the life of existing ones.

"It appears the Government is significantly underestimating the scale of the capacity crunch facing the UK in the next three years and there is a very real risk of the lights going out as a result," said Mr Marchant, who called for "swift action to provide much greater clarity" to potential investors.

Mr Osborne wants to build as many as 40 new gas-fired plants in the next two decades, while in the Budget he promised incentives to kick-start the UK's nascent shale gas industry.

The SSE cutbacks are earlier and more severe than had been expected, and prompted the group to question whether an already-stark warning by regulator Ofgem in October – that the spare capacity in Britain's electricity system would fall from 14 per cent today to 4 per cent by 2015 – was severe enough. The utility formerly known as Scottish and Southern Energy supplies energy to 9.5 million British households and businesses. Its planned electricity cut represents 2.5 per cent of the UK's total usage.

At 4 per cent spare capacity, there is a one in 12 chance of a power cut if demand stays at normal levels, Ofgem has said. That rises to one in four if too much electricity is exported to Europe and one in two if there is a particularly cold winter.

Ofgem, which largely based its forecast on the looming closure of nine coal-fired power stations to help Britain meet targets to reduce emissions, said that it would revise its warning about the network's capacity in the light of SSE's announcement.

"The situation on likely available capacity has deteriorated since this report with more plants closing sooner than expected. We will be providing our updated statutory capacity assessment to government before the summer," an Ofgem spokesman said.

Mr Marchant wants the Government to bring forward from 2018 to 2014 the introduction of a proposed new payment scheme that would, essentially, give gas-fired power stations a fee for existing.

He also wants to know the final details of the proposal, known as the capacity mechanism or market, which he argues is crucial to determining the financial viability of future projects. "There is huge uncertainty regarding future revenue streams," SSE said.

The Energy minister, John Hayes, said: "We're alive to the challenge facing us. We're not complacent about this, which is why we have an insurance policy – the capacity market."

SSE's call for more financial certainty comes after the group reported a 38 per cent leap in profits in the six months to September. However, it said its energy supply arm operated on a profit margin of just 1.5 per cent over the period.