UK: Electricity regions plug into the market. (1 of 3)

UK: Electricity regions plug into the market. (1 of 3) - A big stone has been dropped into the placid electricity supply pool, as Tom Lester explains.

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Last Updated: 31 Aug 2010

A big stone has been dropped into the placid electricity supply pool, as Tom Lester explains.

With many electricity supply contracts coming up for renewal at the end of March, the first fruits of the Government's privatisation policy for the industry are ripening much like the olives growing in the Department of Energy's new atrium at the centre of its London offices. But like the olives, it is probably genetically impossible for the fruit to appeal to all tastes. More than most utilities, electricity supply, and the prices charged, represent an uneasy compromise between the interests of individual consumers, the public at large, the Government, the distributors, the generators, etc.

The sharp reductions in prices to the middle-sized customers which have occurred in the 12 months since the new market system came into effect have naturally been greeted by the beneficiaries with satisfaction, but the strategists worry over the implications for the long-term health of the industry and the economy. The lower prices have had a dampening effect on innovative schemes to make better use of the natural resources consumed, and will do nothing to stimulate necessary investment by the generators in modernising their capacity. More immediately, they did nothing to help the Secretary of State for Energy, John Wakeham, in deciding the final financing details for the flotation of the two principal generators, National Power and PowerGen.

But the essence of a market is to strike a balance between buyers and sellers, and if the pool price - the equivalent of the Rotterdam spot market for oil - currently favours the buyers, a Conservative minister should be the last to complain. It seems that the weakness has arisen not only because of the excess capacity built during the Central Electricity Generating Board's dying years but also because the competition for business between the regional distribution companies, the generators, the Scottish companies, Nuclear Electric and the French is so strong, and also because of recession.

The industry is not quite sure what the strategy of the two generating companies is, but a number of observers are convinced that they are fighting for market share with scant regard for cost criteria. One believes that they are making the same mistakes that the oil companies made - "giving away the product in the hope of buying customers". It is, perhaps, a tribute to the privatisation structure that the market is proving to be very volatile, and industrial customers will not be tied to their suppliers unless they so wish.

What renders the market even more volatile is the series of transitional measures put in place to ease the passage of the industry from a nationalised monolith to a group of independent, market-led companies. Theoretically, each of the 12 regional electricity companies (RECs) is now free to compete for any business requiring more than one megawatt (MW) of power anywhere in the country. However, for practical reasons, most are concentrating only on the borders to their own territories, and for cultural reasons (say their customers) some are still not serious about competing at all, and retain the old nationalised "take it or leave it" attitude.

In practice, up to 80% of the RECs' profit is likely to come from the "use of system" charge (for the wiring etc.) which they will retain, whichever company supplies the electricity. The 1MW threshold was agreed by the industry as a way of limiting the negotiations, which they faced once they were free to compete after April 1 1990, to manageable numbers - around 5,000 customers. The level will be reduced to 100 kilowatts (KW) in April 1994, effectively putting on the market supplies to some 40,000 to 50,000 more industrial and commercial customers, and it will be abolished altogether by April 1998. By that time the RECs should have developed a better understanding of the market, and pricing policies to suit.

Until those dates, customers below the thresholds are confined to the published tariffs, based on the old legal obligation imposed on the suppliers to offer the same terms to all comers. For customers who require more than 1MW, discounts of between 10 and 30% were available for the 1990-91 year, after some haggling. This time round, thinks Aidan Mullaly, a negotiator for TM Energy Consultants, the RECs are better prepared for the negotiating process and are unlikely to panic, as some did last year, at the threat of a loss of business. On the other hand, some customers then "were afraid to ask", and are now armed with consumption data to press their case for preferential treatment on a more appropriate tariff.

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