Not so pretty ‘poly’

We are barely four weeks into the New Year and already I feel in need of a vacation. A recent visit to China and Hong Kong for some high level discussions has taken its toll, and playing catch up after a business trip is always a tall order, especially at this time of year. Still, why complain. We learn to take the rough with the smooth. Yet, it is not always easy to remember that in business, we go through phases.

I have often thought of industries and market structures as miniature universes which – if you believe the big bang theory – explode into pieces as in a decentralized business model or competitive market; and then contract again into a single entity or monopoly. Many would argue that some markets will never go back to monopolies but the concept of competition is in itself destined to end up with a single winner.

It seems to be the way things are heading in the UK – one of the pioneers of competitive electricity markets – and not everyone is happy. US power company, Calpine Corporation recently announced that it was considering selling its 1200 MW Saltend power station. Bob Kelly, Calpine’s chief financial officer commented: “The jury is out on whether we will stay in the UK or not. That market seems to be turning into an oligopoly rather than a deregulated market. If the market fundamentals change, you should exit the market.”

On first analysis, you could concede that Kelly has a point. When the UK market first deregulated, the two big players at the time – National Power and Powergen – were forced to sell capacity and limit the amount of capacity they could own. This brought in new players, many of which were US generators, and led to lower prices for the consumer as well as greater choice of suppliers. But with there being no caps on the amount of capacity a generator can own, what is there to stop the biggest or smartest supplier from cornering the market?

Certainly sales of power stations in the UK due to weak wholesale prices has led to consolidation, leaving just six big suppliers in the market. Interestingly, these are all European: EDF Energy of France; RWE and E.ON from Germany; and Centrica, Scottish Power, and Scottish and Southern all from the UK.

Ofgem, the regulator for the UK electricity and gas markets believes that all the evidence points to the UK still being a competitive market for customers. A spokesperson for Ofgem noted: “Half of all customers in Britain have switched supplier compared to only four per cent in Germany. Latest figures show that 100 000 customers switched supplier each week since November 2004. And there remain big price differences between suppliers. Another sign of effective competition is innovation. Suppliers now offer a whole range of payment methods, special offers, green tariffs, dual fuel deals etc. Yes, some companies have left the market but there are still strong signs that there is vigorous competition out there.”

The UK market is alive and kicking – low wholesale prices or not. While the Americans are running, there is plenty of investment activity. The dominant six generators have all recently bought or announced new power stations to meet growing sales commitments. For example RWE’s subsidiary npower has announced plans to build a new power plant at Milford Haven, while E.ON is to convert its Isle of Grain oil fired station to a gas fired station. There is also big expansion in the wind generation market.

Kelly complains about the market fundamentals changing, and maybe they have. But blaming market structure may not be the whole truth. The scenario of US generators running into trouble because of mounting debts at home, combined with weaker returns in international from markets, is not new. Calpine bought Saltend from another US developer, Entergy, shortly after it opened in 2001. The plant is one of the most modern in the UK and should be at least as competitive as the next plant.

There were no complaints from anyone when wholesale prices and profits were high. When those prices collapse, either you learn to compete better or you go play elsewhere. So we move from monopoly, to many players, to oligopoly. And maybe ultimately back to monopoly? In any game there will be winners and losers. Depending on the nature of the game, sometimes there will be just one winner.

But life and business is about taking the rough with the smooth. The picture is not always pretty, but it is not always ugly. For me, last week it was back-to-back meetings in China and Hong Kong followed by a torturous few days in the office. But for the next 12 days it will be enjoying the delights of carnival in Trinidad and sunning myself on the beaches of Tobago.

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Junior Isles, Publisher & Editorial Director

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