A rather more serious issue, involving the Secretary of State, has been the treatment of the very large users of electricity. Their complaint has been that, so far at least, the market mechanism has not proved effective for such large volumes. The Energy Intensive Users Group has claimed on their behalf that on such volumes UK prices were raised prior to privatisation above the levels enjoyed by overseas competitors. The Government has allowed users a price cap as a transitional measure, but it runs only for a year, until March 1991. The EIUG fears increases of around 25% thereafter.
Mr Wakeham rejected the EIUG's plea on the grounds that the market is now functioning reasonably well, and pool prices are already having a restraining influence. Industry critics further point out that the EIUG's worries last year about sharp price increases did not materialise, and such international price comparisons as there are provide little support for its case. Much depends on overall volumes, load factors and the type of contract, but according to one source, UK prices for, say, an 80MW load with a 60% factor are lower than those of all the major European Community producers except for the French. With a different type of contract, only Germany is more expensive. But significantly, both Germany and Japan manage to remain competitive in spite of carrying some of the highest prices.
Mike Gibbons, ICI Chemicals and Polymers' manager for energy policy and purchasing, and a prominent EIUG member, finds from experience that "other countries have ways of allocating costs and offering more advantageous terms". UK grid charges alone, he points out, are set to rise by 16.5% in 1991-92, while the free market ideal for these quantities of electricity is still a long way off. Discussions with the Department of Energy are continuing.
The problem for companies like ICI is that while the transitional arrangements last, the power suppliers frequently cannot bid for their custom because the suppliers are limited to a 15% slice of the RECs' business, rising to 25% in 1994. Exceptions have been made in four areas where the high incidence of large industrial users quickly took up the 15%, but attempts by the EIUG to have the concessions extended have been rebuffed by Littlechild. One alternative for the very big consumers is to buy direct from the pool, but most managements will conclude that carrying the risks implied is not their legitimate business. In any event, points out Gibbons, if the pool price rises sharply, as many predict, they are still faced with major discontinuity in very difficult economic conditions.
Eliminating the risk element in electricity prices is the most important benefit that ICI expects from the planned 1,725MW Enron power station on Teesside. Some 300MW of the output will be used in nearby ICI plants, and the waste heat in the form of steam will also be used either directly or to generate more electricity, lowering the effective energy costs. Around 1,300MW will be sold to four RECs at prices based on the pool, but the station's costs will be governed by the long-term contract for the gas to fuel it, so that the higher the pool price, the greater the revenues from the excess electricity to offset against higher costs elsewhere in the group.
Smaller-scale combined heat and power (CHP) projects are being widely considered, but in many cases are in abeyance because of the lower electricity prices in the medium demand bracket. The more efficient use of energy which may be in prospect does not ensure economic viability, particularly when interest rates are so high.
One scheme which dates from before privatisation but which has gone ahead is at Tate and Lyle's sugar refinery in Greenwich. There, in a £9 million project, 14MW of electricity is being generated plus process steam by two gas turbines, achieving around 75% efficiency. Savings in energy costs are put at £500,000 annually, although a 10% drop in electricity prices would cut the saving by £375,000. The scheme was planned and is being managed by Emstar, a subsidiary of Shell (which provided the finance). Emstar chairman Richard Tinson claims that there is a lot of interest in CHP schemes because "people don't believe in the low electricity prices".
One of the more vigorous RECs, Midlands Electricity, has decided to enter the CHP business itself, at the smaller end of the market. It has linked with Leverton, a Unilever subsidiary, to offer generating plant in the 50KW to 1MW bracket, based on a diesel engine converted to burn natural gas, with the waste heat used wherever possible. "Some can use the heat, some can't," admits Midlands' engineering director, Mike Hughes. If they can, customers will pay "a little more on the gas bill, and a lot less on electricity". The reduction will not hurt Midlands much because the connection to the grid will still be necessary, and it will make a profit from the schemes installed, not just in its own area but throughout the UK.
Whatever the trend for electricity prices, it seems that the Government has achieved its aim of dropping a large stone into a once placid pool. It will be some years yet before the ripples die out, and a lot more analysis and thought by managements will be required. Lower costs, whether from raised efficiency or lower prices, look a certainty - the catch is, that can only mean lower than they would otherwise have been.
(Tom Lester is a specialist writer on business affairs.)