Memorandum submitted by Energy Networks
Association (ENA)
Energy Networks Association (ENA) is the trade
association for UK energy transmission and distribution licence
holders. It acts in the interest of the energy `wires and pipes'
sectors to achieve excellence in both its internal services and
relationships with stakeholders. It is funded by the UK's electricity
and gas transmission and distribution companies. It's Members
and Associates are asset owners and operators including CE Electric,
Central Networks, Chubu Electric, EDF Energy, ESB, Guernsey Electricity,
Independent Power Networks, Jersey Electricity, Manx Electricity,
National Grid, Network Rail, Northern Gas Networks, Northern Ireland
Electricity, Scottish & Southern Energy, Scotia Gas Networks,
Scottish Power, Tepco, Wales & West Utilities and Western
Power Distribution.
We are grateful to the Committee for the opportunity
to provide a brief outline of how the provision of gas and electricity
network infrastructure essential in delivering energy to the public
is met within the overall costs of the customer energy bill. We
hope that our submission can put in context how different factors
come together to determine the final cost of this infrastructure.
We believe that by providing this information members will be
more ideally placed to better understand the full process that
leads to final the energy bill that is delivered through the nation's
letter boxes.
GENERAL CONTEXT
HOW
MUCH OF
A TYPICAL
HOUSEHOLD'S
ENERGY BILL
IS ATTRIBUTABLE
TO TRANSMISSION
AND DISTRIBUTION?
| | Transmission
| Distribution |
| Electricity | 4% | 17%
|
| Gas | 2% | 20%
|
Source: Ofgem Fact Sheet 66: 15.01.08 Updated Household
Energy Bills Explained
What is the money spent on?
The money raised from the consumer is spent to ensure a safe,
secure, reliable and efficient system. Examples of the type of
operational and capital expenditure are those made to ensure the
resilience and reliability of the network. These can range from
replacing cast iron piping and other components of old networks
to vegetation management to minimise the potential disruption
to energy supplies during storms.
Who makes the decision on how much is spent by the companies?
Over the course of setting a new five year price control
package, there are bilateral discussions between the network companies
and the regulator, Ofgem, (and its consultants) to make an assessment
of the necessary level of efficient investment. Ofgem will ultimately
set an overall allowed revenue for each company based on assumptions
about efficient levels of capital and operational expenditure.
It is then for the companies to decide how best to utilise those
allowances to deliver the necessary network performance over the
five year price control period.
The Regulatory framework that has been in place since 1990
(based on the `RPI-X' approach) has been very successful in encouraging
efficiency, thereby reducing charges substantially in real terms,
whilst at the same time delivering significant improvements in
supply reliability.
CUSTOMERS' BILLS
DOWN
In real terms the reduction in network charges have been:
-Electricity distribution -50% since 1990.
-Electricity transmission -41% since 1990.
-Gas transportation -41% since 1994
Source: OFGEM
QUALITY UP
Meanwhile the quality of service delivererd by the electricity
distribution companies has risen significantly since 2001:
15% reduction in number of customer interruptions
19% reduction in the average duration of interruptions
Source: OFGEM—Figures exclude severe weather events
Why does regional variation in the cost of transmission and
distribution exist?
Regional variations in electricity and gas distribution charges
occur throughout
the whole of the UK. Differences in distribution costs reflect
the cost of maintaining the gas and electricity networks in different
areas. This can be due to the different mix of customers in each
area, the historical development of the networks and the topography
they cover.
For example, there is a need for a higher number of assets
per customer to supply customers in some regions with a strong
concentration of rural areas (see Figure 1 below). This will tend
to increase the costs to the company and hence network prices.
The graph below shows that network length per customer is higher
for WPD's and SSE's north of Scotland area. Network investment
is ultimately funded through use of system charges. Hence customers
in these areas are paying a higher proportion of the network cost
than customers in densely populated areas. Conversely, for EDF's
London network the ratio is at its highest and therefore the amount
of network per head is smallest, ie the cost is spread over more
customers. However, this wll not necessarily mean that London's
prices are the cheapest as there will also be other important
cost considerations, not least the need to underground a substantial
proportion of the network in such urban areas.
In other areas changes in the economic landscape have altered
patterns of demand to which the networks have to adapt. In the
West Midlands for example the network was originally designed
to meet the demands of the large engineering industry which has
now virtually disappeared.
Transmission charges also vary by location. Locational charging
in electricity is designed to incentivise generation to locate
near demand and demand to locate near generation. This is judged
to be more economically efficient as it reduces transmission losses
and hence the transportation cost of energy (financially and environmentally),
Differences in regional gas and electricity distribution costs
as reflected in a typical household customer's bill
Gas | |
Electricty | |
| Annual
Distribution
Component
| | Annual
Distribution
Component
|
| NGG East Midlands | £92.90
| SPN | £44.54 |
| WWU North Wales | £93.25
| CN E | £48.20 |
| NGN North East | £94.91
| CN W | £51.39 |
| SGN Scotland | £95.04 |
LPN | £51.70 |
| NGG East | £98.51 |
EON | £52.11 |
| SGN southeast | £98.79
| YEDL | £59.46 |
| WWU South Wales | £99.66
| SEPD | £60.56 |
| NGG North West | £99.78
| UU | £60.64 |
| NGN North | £100.47 |
Manweb | £63.18 |
| WWU South West | £103.06
| NEDL | £67.99 |
| NGG West Midlands | £105.06
| South West | £69.30 |
| SGN Southern | £110.95
| South Wales | £71.61 |
| NGG London | £114.57 |
SPD | £79.43 |
| GB Average | £100.53
| SHEPD | £87.81 |
| | GB Average
| £61.99 |
Assumptions
Applicable to domestic electricity (gas) customers from April
(October) 2007
Electricity consumption 3300 kwh pa on a domestic unrestricted
tariff
Gas consumption 18000 kwh pa as an EUC1 customer (73200 kwh pa)
How do you explain discrepancies between the regional variations
in gas and electricity distribution costs and the regional pricing
polices of some energy retailers?
The process by which regional variations in the cost of distributing
gas and electricity is arrived at is transparent and open to scrutiny.
Some of the recent regional price rises by energy retailers
have been attributed to the variation in costs of gas and electricity
distribution and transmission.
ENA can only comment on the element of regional price variation
directly related to gas and electricity distribution and transmission.
Any differential beyond these stemming from the retail offering
is beyond our scope to explain.
April 2008
| 
