Select Committee on Business and Enterprise Written Evidence


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.

    —  Ban on self supply.

    —  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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