DTI seeking input on U.K. power market plans

The U.K. Department of Trade and Industry (DTI) has published a consultative document on planned reforms to the regulation of Britain's electricity and gas supply industries.

DTI said it is seeking industry's views on: legislation to bring the electricity and gas regulatory systems under one regulator; separating supply and distribution of electricity under different companies to boost competition; and legislation to support reform of the electricity pool pricing mechanism.

The document follows a government clampdown on building of new gas-fired power plants in the U.K. and the opening of the gas and, more recently, the electric power supply markets to competition.

John Battle, U.K. energy and industry minister, said, "This document takes a significant step forward by exploring in detail the consequences of decisions in our wide-ranging overhaul of utility regulation.

"The gas and electricity industries are at exciting and critical stages in their development. The prospect of enhanced competition offers increasing benefits to consumers as well as a thriving industry."

DTI said the closing date for comments is Nov. 16. No deadline for subsequent legislation has been set: "It will be introduced when parliamentary time permits."

Gas power freeze

The U.K. government recently passed legislation to reform the country's electricity supply market, which includes a curb on new gas-fired power stations.

The new white paper follows a moratorium on the construction of new gas-fired power stations imposed 1 year ago, and a subsequent review of Britain's balance of fuels for power generations (OGJ, Jan. 12, 1998, p. 28).

Announcing the new legislation, Peter Mandelson, Secretary of State for Trade and Industry, said, "Our predecessors botched the process of electricity privatization. They failed to introduce effective competition or to protect the long-term public interest in diversity of supplies; they failed to level the playing field for different fuels; and they risked losing the option of generating electricity from coal, with the obvious threat to our economic security."

DTI said that the energy review showed that the previous government's sale of state-owned coal-fired plants to only two companies and the electricity pricing structure it imposed encouraged investment in gas-fired power schemes and led to higher prices than necessary and a risk of overdependence on one fuel source: gas.

"While some move towards gas was to be expected," said Mandelson, "the review has concluded that the comparative costs of new gas-fired power stations as against the existing coal-fired power stations cannot justify the scale and speed of the 'dash for gas.'

"In allowing these distortions and their effects to persist, our predecessors failed to take account of the need for a diverse energy supply policy. They left a situation in which gas's share of power generation could exceed 60% by 2003 with coal's share less than 10."

Mandelson said that the two generators that now own coal-fired plants, National Power plc, London, and Powergen plc, London, would be forced to sell some of these to increase competition and to boost use of "coal-fired flexible plant."

Power pricing reforms

He added that the reforms would include a radical overhaul of the electricity pool pricing regime, which would reward the use of flexible (that is, coal-fired) plant: "Wholesale prices should come down by at least 10%."

The current curbs on new gas-fired power plants will be temporary, said Mandelson, but will last "as long as it takes substantially to complete our reform agenda across the picture."

The U.K. Offshore Operators Association (Ukooa) greeted DTI's news with concern, saying the continued moratorium on gas-fired power developments will affect the oil and gas upstream industry's investment and employment.

Ukooa also complained that Mandelson did not give a clear timetable for the end of the moratorium, thus creating additional uncertainty for the oil and gas industry.

James May, Ukooa director general, said, "A recent poll of Ukooa members has indicated that the moratorium has already adversely impacted on investment confidence for the majority of oil and gas producers.

"Without a firm timetable for the end of the moratorium, producers will be unable to plan ahead with any degree of certainty with regard to the government's energy policy.

"It is likely that there will be delays in investment decisions to bring on the production of marginal fields and some projects may be deferred indefinitely."

Opening power markets

On Sept. 14, the U.K. government began opening the country's residential electric power market to competition, with about 10% of households in some areas given the right to choose their supplier.

DTI said that, in the coming months, competitive supply will spread, so that all of Britain's 24 million homes and 2 million small firms will be able to choose their power supplier.

The first areas to be opened are parts of the territories of regional electric companies based in East Anglia, Yorkshire, Scotland, and Merseyside and North Wales.

More than 1 million customers have registered to sign up with new electric power suppliers when their sectors of the market open up, and 10,000 households in the initial areas have switched, with more expected to follow.

Battle said, "As customers become used to finding the best deal on electricity in the same way as they look for the best deal in gas, suppliers will have to be on their toes to deliver the best possible service and prices. This will be a consumer-led revolution in energy."

Centrica's progress

Centrica plc, the U.K. gas supplier demerged from British Gas plc, intends to begin supplying electricity to its own and new customers, just as electricity companies have pushed into the previously liberalized U.K. gas supply market (OGJ, Oct. 14, 1996, p. 23).

Centrica claims to have 440,000 signed contracts to supply residential customers with electricity, and had expected to reach a target of 500,000 households signed up by the end of October.

Despite the intense competition in gas supply, said Centrica, it has retained 85% of its customer base in the residential gas market, while the rate of loss of customers to new suppliers has fallen substantially.

Roy Gardner, Centrica CEO, said, "We welcome the opportunity at last to be able to compete in the residential electricity market. We have made a promising start with respect to the number of contracts already signed. A further 1.5 million consumers have expressed interest in being supplied by us."

Cost savings disputed

However, doubts about the potential success of bringing cost savings to customers through competition have already emerged.

Utilities analyst Cap Gemini U.K. plc, London, said companies are typically spending £40 ($65) to sign up each new customer, while net profit per customer per year from electricity supply is only £3-5 ($5-8.40).

John Geoghegan, director of utilities consulting at Cap Gemini, said, "Unless there is fundamental change in the cost structure of the utilities industry, the economics of spending vast sums of money to win new customers makes little sense.

"What is needed is a reduction in energy costs via a more competitive generation market, further consolidation of the supply industry to reduce overheads and marketing costs, and a streamlining of customer service costs."

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