Select Committee on Trade and Industry Minutes of Evidence

Memorandum by the Association of Electricity Producers


  1.  The Association has a membership of some 100 organisations, including generating companies of almost every size, from family businesses to major PLCs. Between them, the members embrace virtually every generating technology used commercially in the UK and scales of production ranging from plant of less than one megawatt to those of thousands of megawatts.

  2.  The Association has no brief to favour any particular generating fuel or technology. It does have, however, a keen interest in the market in which its members make and sell electricity and in the influence of the legislative and regulatory framework on the electricity industry. The legislative and regulatory framework affects security of supply, not least because it has an influence on generators' earnings and on the climate for investment in new power plant.

  3.  The Association provided a written submission to the Energy Review Team of the Cabinet Office Performance and Innovation Unit (PIU), in September 2001 and has taken part in discussions with the PIU.


  4.  As part of its consideration of security of supply issues, the Committee expressed an interest in the possibility of conflict between security of supply and environmental policy. It also asked about the role of renewables and combined heat and power (CHP) schemes.

  5.  The Association recognises the challenges presented by the different requirements of energy policy. Competitive energy prices, security (and diversity) of supply and controls on emissions, including reduction of carbon emissions, are all understandable objectives, but they lead to well known conflicts. When the main driver of energy policy is competitive prices, then measures to deliver environmental objectives or to induce diversity beyond that which normal business decisions would have provided, will usually add to costs and reveal policy conflicts.

  6.  If present policies for the supply of renewable energy succeed, they would assist with the Government's diversity objective by providing ten per cent of electricity from renewable sources. The Association's policy<mr14>, for almost five years, has been to support the idea that, by 2010, ten per cent of UK electricity should come from renewable sources. It also proposed in 1996-97 that consideration should be given to the introduction of a "percentage obligation" on suppliers, requiring them to purchase a proportion of their electricity from renewables. It supports in principle the Government's proposed Renewables Obligation (and its equivalent for Scotland), albeit it has some concerns on matters of detail.

  7.  The Committee will be aware that many renewable energy and combined heat and power schemes that are operating in the open market (ie not supported by Government-sponsored obligations) have experienced serious commercial difficulties since the introduction of the New Electricity Trading Arrangements (NETA) on 27 March 2001. As many organisations, including this association, predicted, NETA has proved damaging for many CHP schemes—the very opposite to the expectations expressed by successive Energy Ministers since the proposals to change the trading arrangements were announced in 1997. The Ofgem study<mr15> of NETA's effects on small players confirmed that there are problems, but the Association believes that Ofgem under-estimated their impact. The Association welcomes the Government's recent response to Ofgem's report, which is a consultation<mr16> on proposals to address the problems.


  8.  The Energy Minister announced at the launch of the PIU Review that competitive markets remained important and the PIU Scoping Note in June confirmed "Competitive markets will continue to be central to energy policy." The Association therefore takes that to be the context in which security of supply, including diversity, has to be considered.

  9.  Electricity customers in the UK are used to high standards of security of supply and any significant reduction in such standards would quickly become a matter for public policy debate. Those standards are not simply a question of having adequate fuel supplies and generating capacity. They are also affected by the quality of the transmission and distribution networks and by the ability to trade across borders.

  10.  In the state industry, before 1990, a recognised plant margin was established to meet defined security standards. In the market after 1990 there have been no such standards, but various licence requirements have sought to encourage levels of security. Generating capacity has not proved to be a problem, however, and plant closures have been more than matched by investment in new plant. This investment has been driven by normal commercial expectations and fostered by a growing understanding of the way that electricity markets function.

<mo14> Renewable Energy: Building on Success. Association of Electricity Producers 1997.<mo15> Report to the DTI on the Review of the Initial Impact of NETA on Smaller Generators. Ofgem. August 2001.<mo16> Government response to Ofgem's reports "The New Electricity Trading Arrangements—Review of the First Three Months" and "Report to the DTI on the Review of the Initial Impact of NETA on Smaller Generators". DTI. November 2001.

  11.  At the same time, there has been a great increase in diversity, in terms of the types of generating plant being operated and the fuels that they use. Such diversity is usually viewed favourably as it reduces over-dependence on particular fuels and is sometimes evidence of technologies competing for sales in the wholesale market. The diversity of recent years is a "happy outcome" which has occurred through the operation of the market and has not been induced, except in the case of a comparatively small amount of renewable energy, which has been encouraged through Government sponsored support arrangements.

  12.  There is reason to believe that diversity could be reduced considerably if the expected development of new gas-fired plant and the closure of Magnox plant proceeds as currently forecast. In its response to the Government's Review of Energy Sources in 1998, the Association indicated that trends suggested that generating plant in England and Wales would be 55 per cent dependent on gas by 2003 and perhaps 70 per cent dependent by 2010, depending on certain assumptions. Today, industry forecasters suggest that the UK will be a net importer of gas in a few years. Furthermore, such imported gas may come from distant sources and some observers suggest that those supplies would be less reliable, either for the technical reasons of managing long supply lines, or for reasons of political stability, or both. Importing fuel, however, is a situation faced by many other countries and in the case of oil, it was normal for the UK for most of the 20th century, even in wartime.

  13.  Where forecasts of fuel sources for power generation are concerned, some caution needs to be exercised. Whether plant with planning consent is actually built depends on a number of factors, including fuel input prices and electricity wholesale prices. The Committee will no doubt take note of the recent announcement by one of the UK's well known generating companies that, during 2002, it will close a generating unit at one of its gas-fired stations and re-open a previously moth-balled unit at one of its coal-fired stations.

  14.  There are signals that demand for electricity (or, more accurately, the benefits that it provides) is likely to rise. Customers want the product and are increasingly dependent upon it. In view of this, it is reasonable to assume that the companies whose business it is to provide electricity will meet that demand. They will have the usual business incentives to secure reliably at the most competitive price the fuel that they need for production of electricity. Increasingly, this may have to be imported and it could be subject to price shocks which would be reflected in prices to UK customers. The extent to which, through public policy, such shocks can be anticipated and absorbed and indeed, whether they should be, is a key part of this debate. The generating industry and its customers need to be fully aware of the Government's attitude to this issue.

  15.  To obtain imported fuel reliably and competitively, the UK's power companies will become increasingly reliant on the effective operation of networks and markets in the rest of Europe and beyond. This applies equally to companies wishing to import electricity itself, as well as gas for electricity production and clearly the Government and the electricity industry's pressure for effective liberalisation of European energy markets should be maintained.

  16.  It has been suggested that the energy crisis in California gave added impetus to proposals for a review of UK policies, not least because the Californian problems had been depicted as resulting from energy liberalisation and market deficiencies. The conclusions which some people reached, however, appear to be at odds with what actually happened in California. The difficulties, principally the failure to provide capacity to meet growing demand, were more to do with the market not being designed to accommodate the dynamic interaction between customer demand and power production, than with any failure of the market itself. The Association notes that the influence of heavy-handed regulation, including environmental regulation, appears to have proved costly in California.

  17.  Markets, however, do not always deliver neat and tidy outcomes and the more open and competitive they are, the greater the risk of periods of over-supply or shortage. This could be true in the case of electricity generating capacity in the UK. There are, however, several areas where public policy can reduce the risks surrounding security of supply. These are set out below:

    —  The Government and Ofgem must allow the electricity market to provide the signals associated with any normal market place, which indicate among other things a requirement for investment in new capacity.

    —  In the wholesale trading regime which operated from 1990 to 2001, there was an explicit capacity signal, albeit constructed on an administered judgement of "probability". The Committee will be aware that this is absent from NETA. The Association is not suggesting that the same process necessarily needs to form part of NETA, simply that the issue is important enough to be worthy of monitoring and perhaps some study.

    —  The Government and its regulatory agencies, in particular Ofgem, can also have an impact on investment in the industry. A stable, predictable and transparent regulatory regime is more attractive to investors than one where intervention in the market is rather more random in its timing or scope of application. The attempts by Ofgem to introduce an unnecessary "Market Abuse Licence Condition" show that the regulatory body is prepared to use discretionary powers of its own to cut across trading rules, established codes and competition legislation. If introduced in the manner that Ofgem has proposed, the Conditions would add to regulatory risk and increase the cost of, or even deter, investment.

  Ofgem's own comments to the Cabinet Office PIU Energy Review are worth noting:

    "Recent events in California provide a clear warning of the dangers to security of supply that can result from inappropriate regulatory or political interference."

    —  Development of new power projects is subject to various planning consents according to the size of the project. The difficulties associated with securing local consent for renewable energy projects are well known. If the renewable energy target is to be achieved, then it may be necessary to bring about changes to the land use planning process, to give energy projects special status in the structure and local plans system, perhaps similar to that given to the minerals industry. Consideration might also be given to steps which enable local communities to secure direct benefits from energy projects, perhaps through the business rating system. This issues applies to equally other forms of generation project and to transmission and distribution networks and pipelines.

    —  The UK's electricity network monopolies provide high common quality standards for electricity as well as allowing high reliability of product delivery. The benefits of this to suppliers and customers are obvious and they enable generation projects to be developed with confidence. That the monopoly businesses should be regulated effectively is critical. Simply driving down costs through RPI-x controls will probably not be sufficient and a more imaginative approach may be needed. Among other things, regulation needs to take account of the effect on both transmission and distribution of the probably growth in generation connected to the distribution networks. In 1998, the Association produced, in response to Government policies encouraging smaller-scale generation, a policy document<mr116> on embedded generation. Among other things, it suggested that distribution networks, where new renewable energy and combined heat and power projects were likely to be connected, might need to become more "active" rather than largely passive distributors of centrally-produced power. The Association welcomes the proposal by DTI and Ofgem to carry out further work on embedded generation issues.

6 November 2001

<mo116> Review of Embedded Generation Issues. Association of Electricity Producers. Juy 1998.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 3 May 2002