Supplementary evidence from Welsh Power
I hope you and the BERR Select Committee found
our evidence interesting and relevant.
I was interested to hear the views of SSE, RWE
and E.ON about the volumes that they trade through the market;
I can't reconcile this with our experience perhaps we also need
to define the "wholesale market" better. Ready access
to power and reporting of traded volumes and prices is critical
and the wholesale market reporting should cover trades of all
descriptions. Given the "Big 6"s apparent enthusiasm
for wholesale trading, the proposals that we made should be quite
acceptable to them.
I was also interested to note that a number
of the "Big 6" (SSE and E.ON) were against further consolidation.
If things have got this far it strongly reinforces the need for
action!
I thought it would be helpful to set out our
views of the sensible remedies for the liquidity and new generation
entry issues as we got through a lot of material in quite a short
time.
LIQUIDITY
— 100% of generation to be sold on
the wholesale market.
— Requirement to sell on a "no
worse" basis across the market and not just to a "closed
shop" subset of the market. Care would have to be taken to
ensure that credit terms were reasonable.
— Given that the "Big 6"
all told the Committee that they do trade their power via the
wholesale market we would not expect any of them to have any problems
with our proposals. This means that a change to the generation
licences could be secured quickly as it requires only a majority
to agree to the change. Once the largest agree, the change can
come into force in a matter of months. This makes it a timely
solution, but it does rely on Ofgem to take a proactive stance
on monitoring.
— An alternative would be for Parliament
to use their legislative powers to require plant divestment. We
would propose that no supplier can be related to a generation
company that could generate, and thus supply, more than 50% of
their supply requirement. In order to help the market in a timely
manner, the legislation would have to require divestment in a
relatively short timeframe, say one year. While this is tight,
it is an achievable timeframe and could have a backstop that plants
not sold through a bi-lateral process would be auctioned.
GENERATION ENTRY
— WPG has only succeeded with Severn
Power its new generation plant because it absolutely meant to
build it.
— WPG does not have an investment grade
credit rating and has to lodge collateral with eg National Grid
so there is real money at stake. Other players are able to use
their credit ratings to book transmission capacity which keeps
it away from the rest of the market, but they may choose not to
build while they assess and rank alternative projects in a number
of markets (eg Germany, Spain, France etc). This creates a low
cost option to build and makes it more difficult and expensive
for competitors to build new generation. A good example is Pembroke
which is on the National Grid list for connection in April 2009—we
understand that construction has not yet started and this is making
the construction of new plant in the same grid area correspondingly
more expensive.
— WPG wants to build a further two
plants but needs more certainty over the process. The consents
take too long to get (it took two years and we still don't have
the pipeline consent).
— Planning processes need to offer
certainty on timetable at present they are open ended.
— The current work on transmission
access may well backfire and make new entry much more difficult,
especially if Ofgem approves the auctioning of entry rights and
the removal of existing rights the generators have built business
on. It is very unlikely that banks will fund new plant under this
sort of regime.
PRICES TO
END USERS
We mentioned to the Committee that the Big Six
claimed to be losing money on supply while still appearing rather
profitable. It may be useful to understand that their current
wholesale supply portfolio gives them a cost of supply that is
not directly connected to the current high prices. All players
will try to lock-in power for the customers that they have committed
to supply. The "shape" of the contracts will depend
on the type of portfolio supplied, but the supplier will try to
match their longer term contracts to their forecast yearly, monthly
and then daily requirements.
For the integrated players they can internally
"contract", allocating their generation output to their
own supply. These internal contracts would have a price of generation
associated with them, without one they could not then price their
retail supply. These generation prices may relate to longer term
fuel contracts, the price of carbon, etc... The deals done, either
internally or externally, are unlikely to give you the "right"
output for each given day, so as demand forecasts are known each
company must fine tune their generation requirements by trading
either day ahead and on the day. We believe that it is the trading
to fine tune positions that forms the bulk of the trading in the
current wholesale market. This is truly a marginal activity.
The fact that the market is simply fine tuning
means that "Big 6" are not currently saving their customers
a huge amount of money. The cost of actually supplying their customers
is made up of the price of contracts they signed in the past,
plus the costs of the fine tuning. However, they should be offering
terms today that will have an element of locking in current supplies
and thus current wholesale prices.
We would be happy to provide any further information
that you require. We would also be able to provide information
on competitor offers that are below wholesale cost but before
doing so I would like to understand how public this would be as
it will contain individual customer information and we may need
to obtain customer consent.
27 June 2008
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