Key features of the UK Electricity Industry
Sectors of the
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
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
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
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:
all reasonable demands for electricity are met;
competition in the generation and supply of electricity;
the interests of electricity customers in respect of prices charged.
licences to persons who wish to supply, transmit or generate electricity;
certain types of disputes between customers and public electricity
the efficient use of electricity; and
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.