UK: Power struggle.

UK: Power struggle. - In spite of delays, market liberalisation should eventually lead to cheaper energy. But buyers with experience of early deregulation trials expect the chaos to cancel out the benefits.

by Katherine Moore.
Last Updated: 31 Aug 2010

In spite of delays, market liberalisation should eventually lead to cheaper energy. But buyers with experience of early deregulation trials expect the chaos to cancel out the benefits.

The electricity and gas industry will one day go the same way as mobile telephones. The competitive energy market beckons, although when is less certain. But whenever deregulation arrives, we will have directories full of prospective energy suppliers (many of whom will offer both electricity and gas together) plus assorted agents and brokers - all promising a myriad of tariffs and 'added-value services'.

Energy buying has been heading in this direction for the past four years.

Britain's 20 million-plus energy consumers will find cheaper energy up for grabs. Everyone, from a family of four in Croydon to ICI's mammoth Runcorn chemicals complex, will be free to abandon their monopoly supplier and shop around for the best energy deals. For purchasers this means buying energy should become cheaper - with discounts of between 10% and 20%.

The trouble is, each time there is a due date, it is moved back. More complicated still, each household or business can switch to an alternative supplier depends on its location and, to some extent, the size of its gas and electricity bill. Premises with an electricity expenditure of more than £8,000 a year have been able to switch suppliers since 1994.

Some firms - mainly in heavy industry - have enjoyed that freedom for even longer.

For gas customers, the chance to switch supplier has come even more quickly.

Business customers, for example, who pay bills of £800 per year, have been free to buy gas on the open market for the past five years. Now, gradually, the remaining millions of buyers will be introduced to contract - instead of current non-negotiable standard monopoly tariff - electricity and gas.

However this shift to open competition won't happen all at once. Rather competition will be introduced into the gas industry in a number of staggered phase-in stages. The timetable for opening up the electricity market is more complicated - depending both on postcode areas and the efficiency of local suppliers in setting up the IT systems needed to manage customer transfers to other suppliers.

At present, the first stage of this process will probably see only a small proportion of businesses in four regions - those currently supplied by Eastern Electricity, Seeboard, Yorkshire Electricity and Manweb - given the go-ahead to shop around.

Massive question marks still hang over the deregulation timetables for both electricity and gas, particularly the former. Opening up the gas market is easier because the industry starts with an advantage - the market only had one supplier to begin with, British Gas. For electricity it has been very different: getting 14 different electricity companies to collaborate on industry-wide IT systems and the rules of play for open competition has been like forcing an octopus into a string bag.

Electricity regulator Stephen Littlechild, who originally pursued a target date for the open energy market of 1 April in a steadfast manner, showed signs of weakening resolve, when, in the final weeks of last year, he admitted that maintaining the deadline was looking 'increasingly difficult'.

Some electricity companies admitted some time ago that they already assume it will be missed.

At time of writing the official line from the Office of Electricity Regulation (Offer) was still that the 1 April target date remains, that customers can expect to see price cuts, and that a controlled market start-up which allows only a fraction of customers to switch at any one time should iron out any software problems.

Energy experts and buyers themselves are not convinced. 'I think it will be the end of 1998 - possibly later - by the time the market will be opened completely,' guesses Don McGarrigle, chairman of the electricity buyers group, part of the Major Energy Users' Council. And whether or not Offer sticks to its plan, the industry and users expect to see problems which will affect buyers.

Duncan McDermott is a director of Entech Energy Consultants and his scepticism is typical of industry experts: 'There is a huge question mark over whether the suppliers can provide the service. In tests, billing and transfer systems can work fine, but even if they get the Offer stamp of approval they may not work in the real world.' He has been handling energy purchasing for several years and recalls the chaos that ensued when, in 1994, a small fraction of the electricity market was opened up. 'Most organisations didn't receive a proper bill for six months and some accounts were not cleaned up for two years, which caused huge administrative problems for companies.'

Nationwide was one such company. Its energy manager, David Bailey, recalls that billing inaccuracies for just 10 sites cost the company around £15,000 to sort out.

Bailey's experiences are typical. But according to his counterpart at Boots, Andrew Jones, the teething troubles of the 1994 electricity market were dwarfed by the problems experienced in gas. Many companies were assigned the wrong account numbers and the bills that went with them. For others who switched suppliers, BG's pipeline arm, TransCo, failed to read meters and made estimates instead. Estimated bills created accounting nightmares for larger corporate customers who were unable to allocate energy bills to the appropriate tax year. Many are unsure if the savings made have been worth all the trouble.

While the problems with introducing competition in the gas market have, according to the gas regulator, been ironed out, the story is unlikely to end here. 'With many more people expected to transfer from their incumbent electricity supplier this year, the problems have not yet begun,' warns Jones.

Despite the problems that could mar what will be the world's first large-scale retail energy market, there will, of course, be benefits. McDermott believes that the price cuts already offered for business customers are larger than might have been expected last year. 'We are talking at the moment about anything from 10% to 18% reductions on tariff prices,' he says. But whether suppliers will maintain these offers - in the gas market some providers withdrew cut-price offers last year - remains to be seen.

'We are taking these deals with a pinch of salt,' says McDermott. 'We still feel that some suppliers' plans are in their infancy, that they remain undecided on how to price.'

More concrete signs of price reductions do exist. British Gas has set out its stall and is offering 15% reductions on average power bills. Gas deals offered by electricity companies are coming in at around 20% less than British Gas.

But these are the prices offered to householders and there are already signs that domestic and non-domestic markets could diverge. One reason for this divergence is that the rash of so-called dual-fuel packages (electricity and gas provided by the same supplier) offered to domestic consumers and the smallest business users have so far proved unpopular with the larger buyers. Major corporate buyers who have experienced the hiccups in billing procedures in both gas and electricity are reluctant to rely on a combined account for both fuels. 'If we had a small number of large sites, dual fuel might be a viable option,' says Bailey, 'but they are two wholly independent billing systems. Anyone who thinks that combining them is simple is a bit naive.'

Finding good energy deals could prove substantially harder for businesses than households for two other reasons. First, tendering will involve substantial effort. Each supplier will need files of information containing each site's unique supply number, current tariff details, site addresses, postcodes and annual consumption data - information that many businesses do not have to hand. Second, to take full advantage of the competitive electricity market, businesses will have to make a decision about each site individually - whether, for example, to install new hi-tech metering equipment which will monitor half-hourly consumption or rely on an average demand profile assigned by the supplier. Half-hourly metered customers are substantially more attractive to suppliers and will be rewarded accordingly. But installing the new meters is a costly exercise.

So is it worth shopping around next year when deregulation finally arrives?

Opinions differ. 'It has got to be worth it,' says McDermott. 'At least for a one-off price cut.' McGarrigle is more cautious, advising that it may be worth waiting for the market to settle before switching. 'But that doesn't mean you cannot negotiate,' he adds. 'I would be negotiating as hard as I could with the incumbent regional electricity supplier and signing up with them for a year. And when liberalisation arrives, a full choice will be available all over the country.'

Members of both the Major Energy Users' Council and the Utility Buyers Forum are similarly divided on this issue. Some are reluctant to sign with new suppliers for the time being, preferring to wait and see. Others advise going for the best of the offers currently available.

Ultimately, McGarrigle believes the former view will prevail. 'I honestly believe most businesses will stay with their current suppliers unless they are tempted by dual-fuel deals or by British Gas,' he says. 'I think when they look at the numbers involved, most will take the easy way out. Competitive tenders will involve them in cost, time and effort. I just wonder how much differentiation there is going to be. But I hope I'm going to be wrong.'

For those who would rather not take the easy way out but are daunted by the decisions to be made, there is another option. Why not use one of the directories that is bound to spring up, and leaf through the pages on consultants and brokers? For a share in the savings or a one-off fee, consultants will handle the tendering and many will handle accounts. Not a bad option for those lacking the energy to shop around for themselves.

NATIONWIDE REJECTS THE EARLY BIRDS AND WAITS FOR JUICIER OFFERS

Combined expenditure on gas and electricity topped £5.1 million last year for the Nationwide Building Society's 682 branches and 11 corporate centres. In recent years only 10 of the Nationwide's sites have qualified for the competitive electricity market and a further 50 locations have qualified for the competitive gas market. Until now this has proved a manageable number for Nationwide energy manager David Bailey to deal with.

But with full competition on the horizon, he needs help.

His new tactic is to find someone else to handle the company's complex energy purchasing requirements. Bailey has a smaller energy bill than that of Boots (£30 million) and, unlike his counterpart, Andrew Jones at Boots (see box on opposite page), more modest aspirations for becoming directly involved in the market. 'We shall use external consultants to handle our energy requirements,' he explains. To that end Bailey interviewed 16 power brokers in 1997. Once selected, the winning broker will handle Nationwide's energy database, tender for both gas and electricity, deal with bids from all suppliers, check the bills and monitor usage.

To assist the winning broker, Bailey is preparing a mountain of energy-related information. This centralised database should prove a boon when the broker begins negotiations. Many organisations lack such information because they delegate control of energy budgets to individual cost centres and utility bills are dealt with purely at site level. For companies like these, the advent of negotiating all accounts en masse could prove tricky.

Bailey is in no rush to have everything in order by the 1 April 1998 deadline. Only 150 of Bailey's sites will be eligible to join the competitive market at that point. 'I think it will be a fracas so I will probably hold back and wait for a little while,' he says. Holding back will mean Bailey misses the price cuts likely to be offered as an incentive to switch electricity suppliers. However, the loss of savings in the short term will be offset by a greatly reduced 'hassle factor'. So far Bailey has opted against making any hasty decisions. He has not yet switched any of his gas suppliers, even at some of the smaller sites where the opportunity to do so already exists.

Nevertheless, Bailey expects to shave £180,000 from Nationwide's electricity bill this year and half as much again in 1999. The company spends less on gas but still expects to see savings of £40,000.

Nationwide has studiously ignored any 'early bird' deals offered by his current electricity suppliers - sweeteners to encourage the company to remain loyal next year. 'I honestly expect to get a better deal by waiting until later,' Bailey says. Indeed some of the offers he has received so far fail to match even the price cuts for all tariff customers which will be imposed next year by the regulator.

Moreover, taking one of the early deals would have meant remaining with 14 different suppliers, which is not Bailey's plan. 'I really want to go for a single electricity supplier - one which can handle electronic billing.'

Bailey is not looking for a joint electricity and gas supplier. 'My choice is to go for open tender on both. Historically, the expertise needed to supply gas and electricity differs greatly and I would be cautious about the ability of a single supplier to provide both.'

BOOTS HAS YET TO BE CONVINCED BY THE 'ADDED-VALUE SERVICES

' Andrew Jones, group energy manager for the Boots Company, handles the organisation's annual energy expenditure of £30 million. This bill covers the whole range of Boots' energy requirements from Boots Opticians, to Do-It-All stores, Halfords, Boots the Chemist and two large manufacturing plants. Last year Jones dealt with 14 electricity companies and two gas companies. This year, if full competition is introduced, it could be one.

Boots has 2,130 UK sites, the largest of which is a 300-acre site at Beeston, Nottingham, where Boots runs its own combined heat and power plant.

At present only 10% of Boots' sites buy electricity from the competitive market. But when the market deregulates, Jones will switch the others to competitive contracts. Jones believes the 220 or so sites which already buy on contract have benefited considerably.

'When the market opened back in 1994, electricity costs were slashed by 12 %,' he recalls. 'But it was an administrative nightmare. Metering and billing caused the main problems. When we changed over from a tariff to contracts it was extremely messy.'

Boots opted for a single supplier for its larger English sites. Now, 219 of them are supplied by PowerLine - the Midlands Electricity brand which provides electricity for businesses. Boots' only large site in Scotland is supplied by Scottish Power. 'Basically we invited tenders from every company and, at the end of the day, the decision was 95% about price and 5% about service,' Jones explains. He is not convinced by the 'added-value services' offered by suppliers. Jones believes Boots can provide these services itself and has its own in-house energy monitoring and advanced data and bill-handling systems in house.

Although he is anxious to reap the financial benefits of the fully open market as early as possible, Jones has not yet been won over by any particular supplier. He has yet to decide which sites to move to half-hourly metering (where meters are read automatically every half-hour rather than periodically), but has not received the necessary financial information on the costs involved from the Electricity Pool. 'We should be clear on all costs by now to make decisions for a 1 April start,' he says. It now seems certain that the start date will be missed. So, while Boots expects to make savings this year, poor information about metering costs and the likelihood that timetables will slip means estimates of these savings vary considerably.

Jones sees difficulties ahead. 'I think there will be software problems.

I am told lessons have been learned from the parts of the market that are already open, but I still think that there will be difficulties. The numbers of companies involved in a fully open market are greater, so the problems will be more significant. However, we are optimistic and well-organised so we will be working with all parties to gain benefits as early as possible.'

WITH WASTE HEAT AND A GOVERNMENT GRANT YOU CAN MAKE YOUR OWN

Why not opt out of energy buying altogether and produce your own?

Companies with spare capital, some extra space and a large demand for heat either in industrial processes or as space heating have the option of building their own combined heat and power (CHP) plant.

The idea of combined heat and power is a favourite of the Labour Government.

Within days of his appointment at the Department of Environment, Transport and the Regions (DETR), deputy prime minister John Prescott had written to 300 UK businesses advocating the use of this highly efficient form of heat and power generation.

The basis for CHP production is a conventional generating plant, but while waste heat produced in power stations escapes through cooling towers, a CHP plant captures the excess heat as steam and uses it for nearby industrial processes or heating. CHP plants account for just over 5% of power generation in the UK and are particularly popular in the chemical industry and in paper milling.

Incentives for CHP development include grants and exemption for smaller plants from the requirement to gain a power generation licence from the government regulator. For industry and commerce, perhaps the two most important grants are one funded by TransCo (the gas pipeline arm of BG) and one by the DETR. Both are administered by the Combined Heat and Power Association. The former offers up to 90% off the cost of feasibility studies for a new CHP scheme - an offer taken up by, among others, Gatwick Airport and a Muller yoghurt plant in Market Drayton. The second provides capital grants worth up to 25% of the cost of smaller.

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