APPENDIX 1
Memorandum by the Association of Electricity
Producers
1. The Association of Electricity Producers
(AEP), with a membership of around 100 companies, represents the
interests of the electricity generation sector in the UK. Between
them, the members embrace virtually all of the fuels and technologies
used for commercial electricity production, from coal, oil, gas
and nuclear power to wind, wave and hydro power and production
from a wide range of waste products.
2. The Committee has stated its intention
to examine the effects of recent gas and electricity price rises
on both domestic and industrial and commercial customers. The
context for this brief response from the Association is that gas
fired generation accounted for 38% of UK electricity production
in 2003 and this used around 30% of all gas consumed in the UK.
The market for electricity production is competitive; so much
so that, in recent years, there have been notable business failures
in the generating sector. A competitive retail market adds to
the pressure on the generating market.
3. The gas destined for electricity generation
is procured by a variety of means; contracts have varying durations
and delivery characteristics. Tolling arrangements are also employed
by some companies.
4. Irrespective of the contracting structure,
however, the effects of rising gas prices will be felt, either
directly or indirectly, by companies with gas-fired generating
assets. It is therefore inevitable that electricity prices will
exhibit some responsiveness to gas prices, as indeed they do to
other fuel prices. This is particularly the case since, increasingly,
gas is being used alongside coal in the peak and mid-merit part
of the market. Coal prices have also shown a very substantial
increase in recent times. Wholesale gas prices for this coming
winter, however, have shown signs of easing recently.
5. The Association noted the findings of
the Ofgem probe into wholesale gas prices and the FSA inquiry.
It is glad that the market was not found to be fundamentally flawed
or subject to manipulation.
6. The Association, which has long been
in favour of the liberalisation of European energy markets, shares
Ofgem's desire to see improvements in the efficiency of European
gas markets. It looks forward to further liberalisation, greater
liquidity and greater transparency, which should benefit the UK
in terms of the trading of gas with the rest of Europe.
7. The Committee may wish to note that a
recent report by the European Commission[1]
found that end user prices for electricity in the UK, as of July
2004, are extremely competitive with other EU countries; the lowest
for large users and only just above the Nordic bloc for small
customers. The report also notes that UK wholesale prices are
in line with the European average. The Commission commented that
"Competition in the GB market is well established with a
sufficient number of players. This has led to significant improvements
in the competitiveness of the sector which continues to benefit
both large and small customers."
8. There are, however, upward pressures
on the UK's wholesale electricity prices, apart from those related
to fuel costs. The environmental requirements on the generating
sector, such as the EU Emissions Trading Scheme for CO2; SO2 and
NOx abatement programmes and the substantial investment expected
in renewables will all have an impact on prices. Significant investment
will also be needed to update the UK's ageing infrastructure both
in power generation and networks.
9. The electricity wholesale market[2]
in the UK is based on the principle that prices should vary in
line with supply and demand fundamentals. Price volatility is
an inherent part of this model, with, for example, high prices
at peak periods providing a signal for previously uneconomic plant
to be restored to the system or for new investment perhaps to
be contemplated. In order for a market of this nature to function
properly, it is essential that the Government and Ofgem create
a stable regulatory framework within which the market can function
efficiently. Any policy initiatives must be well-signalled, timely
and consistent with the Government policy framework. This is crucial
to both short term order in the market and long-term confidence
for investors. Ad hoc intervention will undermine confidence in
the market.
1 Quarterly review of European Electricity Prices:
Issue 1 October 2004, DG Energy and Transport. Back
2
New Electricity Trading Arrangements (NETA), introduced March
2001 and British Electricity Transmission and Trading Arrangements
(BETTA) to be introduced April 2005. Back
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