Select Committee on Business and Enterprise Written Evidence


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
Electricity4%17%
Gas2%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





 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2008
Prepared 28 July 2008