UK deregulation brings benefits for consumers

Professor Stephen Littlechild sits down to discuss trends and issues in a Power Engineering International exclusive interview

By Kevin Dodman, European Editor

Against the background of increasing power industry deregulation worldwide, Professor Stephen Littlechild, the UK`s director general of electricity supply, took time from his busy schedule to discuss how the market has developed and how consumers have benefited.

Littlechild is in charge of the Office of Electricity Regulation (OFFER). It`s a tough job and has seldom been tougher than now, as a UK general election approaches and speculation increases regarding how the politicians will seek to influence the future shape of the power industry.

Energy will be near the top of the political agenda because full deregulation of the power industry, including the domestic market, is planned for 1998. There has also been heated debate recently regarding top-executive pay within the utility companies, the possible imposition of windfall taxes on profits, and maybe even a carbon tax.

Those issues will be widely reported as they unfold. Meanwhile, we were interested to find out more about how the role of the regulator in the UK has developed and what lessons Littlechild feels his experience may hold for other countries embarking on the same process.

As can be seen from Figure 1, the UK is regarded as having the highest level of private ownership and the most decentralization of all the European electricity markets. According to Littlechild, the role of the regulator in the UK can be summed up as promoting competition and protecting customers by monitoring the development of competition and setting controls on parts of the industry.

He said that when the UK power industry was privatized in 1991, around 80 percent of total power output was produced by the two large generators, National Power and PowerGen, and it wasn`t clear how the market would develop.

In practice, competitors entered the market more quickly than expected, and new capacity grew rapidly; by the middle of 1995, National Power`s 20,243 MW of capacity represented 31 percent of the total, and PowerGen`s 15,602 MW represented 24 percent.

While their market shares fell, National Power and PowerGen retained a greater influence over the price of power than had been anticipated. Indeed, one recent report suggested that during 1995, the two large generators set the price of electricity 85 percent of the time. Average monthly pool prices from 1990 to 1995 are shown in Figure 2.

Littlechild commented that he always felt there would be a period when there was insufficient competition and that he would need to take a close look at the generators. Immediately after deregulation, it was difficult to predict the extent to which they would be able to reduce their operating costs, because at that time the power of the capital markets, the effect of competition and the influence of the regulator were all unknown factors. In practice, they reduced their costs by much more than had been expected and turned in significant profits.

To increase competition in power generation, OFFER suggested that National Power should sell off 4,000 MW of capacity and PowerGen, 2,000 MW. One of the regional electricity companies, Eastern Group, made a bid for all 6,000 MW.

Littlechild feels that disposal of 6,000 MW will prove sufficient in making a tangible difference to competition, while not making an unreasonable impact on the two companies` shareholders. He commented that on its own, the disposal would be unlikely to make a significant impact, but it is taking place within the wider context of the growth of independent power and is roughly equal to the amount of new capacity coming onto the system.

Regarding opportunities for independent power producers (IPP), he commented that the UK market has been attractive for the independents in the past, with new high-efficiency plants enabling them to compete effectively. Another aspect of the market is that it has been possible to set up flexible gas contracts, which has helped plant flexibility.

There is continuing strong competition worldwide between the power generation equipment manufacturers. Recent reports suggest that they regard deregulated markets such as the UK to be unattractive because, after an initial rush of sales to IPPs, the markets have been flattened by steady downward pressure on power prices, which is tightening the generators` margins. This suggests that regulation is encouraging effective competition.

Another feature of the UK industry over the last couple of years has been a flurry of takeover bids. Two, National Power`s bid for Southern Electric and PowerGen`s bid for Midlands Electricity, were expected to go ahead but were blocked by the UK government, so we were keen to hear Littlechild`s reaction.

He welcomed the government decision, because he didn`t feel that the two deals would add to competition. Indeed, they might even have reduced it, because two large regional electricity companies would have been removed and new entrants might find it more difficult to get into the market.

Amidst all the attention being paid to competition between generators, how have customers benefited? Figure 3 gives an indication of price changes in real terms for both industrial and domestic customers. Summarizing the progress so far, Littlechild commented that domestic prices are now 11 percent lower in real terms than before privatization, while the reduction has been between 15 and 18 percent for industrial customers. Other benefits have included improved levels of service and better speed of response to service calls. He said that the standards set have been exceeded, and customer complaints have fallen by 50 percent.

Turning to markets outside the UK, Littlechild commented that there are a number of areas where newly privatizing markets can learn from the UK experience. First, he said that the transfer to private ownership, competition and regulation all go together. Then, the generation side of the business presents a number of challenges, and competition in supply is very important in getting prices down.

He feels that the regulator needs to be actively involved in the market, largely because regulation through the courts is too slow.

Commenting on current progress in the US market, he said that he was pleased to see that some of the UK experience seems to have been useful, and that competition in generation had been followed by competition in supply, with transmission separated and pricing structures now receiving close scrutiny. END

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