Select Committee on European Communities Twelfth Report


Key features of the UK Electricity Industry

Sectors of the industry

1. The main elements of the electricity supply industry are standard across the UK, though the institutional structures differed on privatisation and have since undergone further change. In Scotland, there are two "vertically integrated" utilities - Scottish Power and Scottish Hydro - which generate electricity and are responsible for its transmission and distribution. Northern Ireland Electricity was vertically integrated, but generation has been divested and it is now responsible for transmission and distribution only.

2. While the initial separation of functions is now less clear cut, the electricity industry has four components:-

(a)  Generation - Power generation is undertaken by about 20 companies. These include major companies such as National Power and PowerGen, owning several power stations, and numerous small companies, some of whom own a single power station. Nuclear capacity is owned by Magnox Electric and British Energy.

(b)  Transmission - This comprises the high voltage transmission networks, used for the major power transfers. In England and Wales the network operates at 400 and 275 kilovolts (kV), and is owned by the National Grid Company. The Company is also responsible for controlling the system, matching supply with demand by instructing power stations to generate when they are needed. The order in which power stations are brought on line to meet rising demand depends on the bids they make into "the pool" (see below).

(c)  Distribution - Distribution of power at voltages of 132 kV and below is undertaken, in England and Wales, by 12 Regional Electricity Companies. They own the networks and are responsible for local control.

(d)  Supply - The purchase and sale of electricity can now be undertaken by any company which secures a licence from the Regulator. There are about 70 companies active in the supply business and all consumers are free to choose the supplier.

3. The UK electricity industry is now fully liberalised. There are no restrictions (apart from the need to secure the necessary consents and meet technical standards) on new entrants wishing to construct power stations. Consumers are also free to choose their supplier.

The Regulator (OFFER)

4. The electricity industry is regulated by the Office of Electricity Regulation (OFFER). The Director General or "Regulator" reports to the DTI. OFFER's duties include:

·  ensuring all reasonable demands for electricity are met;

·  promoting competition in the generation and supply of electricity;

·  protecting the interests of electricity customers in respect of prices charged.

·  granting licences to persons who wish to supply, transmit or generate electricity;

·  determining certain types of disputes between customers and public electricity suppliers;

·  promoting the efficient use of electricity; and

·  caring for the environment.

5. The Government has announced its intention to merge OFFER with the regulatory authority for the gas industry (Ofgas) under the forthcoming Utilities Bill. In the meantime, both offices are now run by a single Director General.

The Pool and NFFO

  6. The NFFO, SRO or NI-NFFO contracts held by renewable electricity generators guarantee that all the power they generate will be taken by the system at the price per unit specified in the contract.

  7. Other electricity generators are obliged on a daily basis to indicate their availability and to submit bids of the price they wish to secure for their generation for the next 24 hours. As demand fluctuates over the day (and supply from renewables also varies), these bids are used to determine the order in which generators are called on to generate to keep aggregate supply in line with demand.

  8. The actual payment to generators is determined not by their own bid price, but by the bid price of the last generator called on in each half hour period to match supply to demand. Consequently, bid prices do not necessarily bear any relationship to the generating cost of the plant concerned.

  9. For example, most of the nuclear generators, and some other plant submit bid prices of zero. When the aggregate of their generation is sufficient to meet demand, they will be paid nothing, although this is rare. However, when other capacity is brought on stream to meet higher levels of demand, all are paid at the highest bid price called on in the period.

  10. The "pool price" is the average price paid for electricity under these arrangements. It is generally regarded as the market price. It is also used the reference value for determining extra costs of renewable generation In turn that sets the NFFO levy met by consumers, at present 0.7 per cent in England and Wales.

  11. Renewable generators without NFFO contracts have, in the past, received only "pool price" for their generation (in England and Wales) or "marginal fuel costs" (in Scotland or Northern Ireland). A preferred course was to negotiate contracts for their output with energy suppliers or to particular consumers in industry or commerce.

  12. The DTI's 1999 consultation document noted that "using pool price as a reference probably over-estimates the additional costs of renewables". The pool is, in any case, set to disappear under the Review of Electricity Trading Arrangements, now under way. The consultation document suggested that a possible way of establishing a reference price might be to auction the rights to output from renewable plant which are contracted under the new arrangements. One such auction took place in mid-1998 - for renewable embedded generation provision commissioned under NFFO1 and NFFO2, for which premium prices have now expired. This gave a price of about 3p/kWh.

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