House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Written Evidence

Memorandum submitted by Association of Electricity Producers

1. The Association represents a wide range of electricity generating interests embracing well over 90% of the UK's electricity production. The membership includes all the major electricity companies and a wide range of other enterprises from PLCs to small family-owned businesses. Virtually every generating technology used commercially in the UK—from coal, gas and nuclear power to a wide range of renewable energies—is represented in the Association.

GENERAL COMMENTS

2. The Association has supported strongly the development of markets for the production and sale of electricity and for gas, which is an important fuel in the power generation sector. Since it was formed in 1987,[2] it has seen the introduction of the Electricity Pool of England and Wales and the abolition of the Pool in favour of the New Electricity Trading Arrangements ("NETA") and later the extension of NETA from England and Wales to Great Britain ("BETTA"). The electricity wholesale market is now mature and even detailed modifications to market mechanisms are less frequently proposed than was once the case. The available evidence on market competitiveness does not support changes to the existing market frameworks.

3. It is vitally important that investors in the electricity generating industry should have confidence in the electricity and gas markets. This is a prerequisite for securing the massive new investment which is necessary to replace ageing power stations and thereby maintain security of supply and deliver the low carbon power generation that the climate change agenda requires. Confidence is derived from a market framework that is seen to work and from clear and stable public policy which minimises political and regulatory uncertainty and hence risk.

4. Clarity and stability, however, have not been strong features of energy policy in the last 10 years. During that time, there have been three fundamental reviews of energy policy, each with a different emphasis in terms of its outcome:

— Review of fuel sources for electricity generation 1998;

— Energy Policy Review 2003; and

— Energy Policy Review 2006.

5. There has been an extensive programme of environmental legislation relating to clean air measures (largely EU-driven) and to the climate change agenda and recently, rumours of a "windfall tax" to fund measures to alleviate fuel poverty. In addition, there has been a constant stream of regulatory measures and proposals.

6. The Association hopes that this review (and the parallel investigation by Ofgem) does not lead to proposals for fundamental change. The industry is poised to make very large investments in new power stations and it could be very damaging if potential investors were to be confronted with new political and regulatory risk.

RESPONSE TO SPECIFIC ISSUES RAISED BY THE COMMITTEE

Whether the current market structure encourages effective competition in the retail markets for gas and electricity

7. The Association does not feel competent to comment on the retail market.

Whether there is effective competition in the wholesale markets for gas and electricity

8. Competition in the wholesale electricity market is highly effective. There are no barriers to entry other than cost. Risk, however, is real and in recent years, when wholesale prices fell dramatically, companies went out of business in the generating sector. Despite this, it is still possible to build a business in this market and there are examples of that within the membership of the Association.

9. The chart below shows the percentage share of generation capacity owned by specific companies or types of company in Great Britain. It clearly illustrates the general growth in diversity (and hence competition) in the wholesale electricity market since the original market liberalisation and the large number of significant and distinct entities currently in active competition with each other.

Source: MMC Pacificorp and the Energy Group plc, Pool Statistical Digests, NG Seven-Year Statement & Pyry Energy Consulting estimates. All years are calendar years ending December, capacity shown as at 1 January at start of calendar year.

10. The government has itself commented on the effectiveness of competition in the UK market. The 2007 Energy White Paper remarked that "To date, the UK has benefited from one of the most competitive and reliable electricity markets in Europe with "cost-reflective" prices" (para 5.1.5, p126).[3] In addition to BERR and Ofgem, a range of other bodies have described the UK wholesale electricity market as competitive:

11. Prices, of course, have fallen and risen. Price increases have been in response to rising fuel costs (gas prices increased by 83% and coal prices by 97% between February 2007 and February 2008) and environmental legislation has played a part, too. It would not be surprising if prices rose further in response to fuel costs, investment costs in power stations and network charges and generating businesses' response to ever-tightening environmental legislation.

The implications of growing consolidation in the energy market

12. The market remains open and competitive and to date, the Office of Fair Trading has been content to clear mergers between companies. Consolidation can reduce the risks for the players affected and it can result in cost savings.

The relationship between the wholesale and retail markets for electricity and gas

13. The Association is not directly concerned in the retail market, but it would expect to see retail prices driven up by wholesale market price increases given the proportion of wholesale costs in retail prices (see Ofgem factsheet 66,[9] 15 January 2008), albeit tempered by the competition in both sectors. As noted in Paragraph 11 above, wholesale electricity price increases have, to a large extent, been determined by fuel price increases and the costs of environmental legislation.

The interaction between the UK and European energy markets

14. The Association continues to support the opening of European energy markets as something that will help to sustain the competitiveness and security of the UK industry and is engaged in the discussions that arise from that—regulation, cross-border trading, environmental issues, etc. However, the UK cannot expect the benefits of increased linkage to the single European market (for example, in terms of security of supply) without also being affected by the prices which prevail upon that market. In fact, the interaction today goes farther than the relationship between the UK markets and the wider European energy markets. Many fuel prices are set globally.

The effectiveness of regulatory oversight of the energy market

15. The Association is not always in agreement with the decisions and positions taken by the industry regulator as Ofgem has a tendency to micro manage issues. That said, Ofgem is generally supportive of market-orientated solutions to problems, which tends to make regulation more predictable and which stance aligns with the policy of the Association. We should be concerned if there were to be radical changes to the regulator's remit. Ofgem's remit, of course, is already much wider than the oversight of the competitive wholesale market. It regulates the monopoly networks for example and its decisions in that area have an effect on the competitive market—in operating costs generally and in opportunities for investment.

Progress in reducing fuel poverty and the appropriate policy instruments for doing so

16. The Association is aware of the government's concern about this issue and of the engagement of some member companies with energy retail interests in the debate about what to do about it. It does not have a view on this matter except that the issue appears to be primarily a matter of social policy, rather than energy policy.

7 April 2008