The rise and demise of electricity competition

Author Alex Henney published The British Electric Industry 1990-2010: the rise and demise of competition in 2011. In this issue of Energy Source & Distribution, Mr Henney discusses the lessons learnt from British electricity market reform.

The first stage of the competitive restructuring and privatisation of the Australian electric industry in Victoria in 1993 benefited from the experiences – good and bad – of the restructuring in Britain. The generation of the State Electricity Commission of Victoria was split into five companies which were more competitive than in Britain. The transmission was split out; VicPool was created as an improvement on the Pool of England and Wales; distribution was rationalised into five distribution businesses with price controls (which were more carefully set than in Britain); and retail competition was introduced in phases along with vesting contracts between generators and retailers which both allowed staged learning and a basis to privatise the generators. Subsequently, the market expanded and became the National Electricity Market, and there have been developments in Australia that reflect changes in Britain – notably moves to consolidation of retailing and to a lesser extent generation – but will Australia follow the track to greenery? There are lessons from our changes and political dreams.

Due to the attempt to privatise the nuclear plants in an ill-judged way, the generation industry in England and Wales was created as a duopoly of price-setting companies – National Power (40 GW) and PowerGen (16 GW) – that were privatised in 1991. The regulator spent a decade trying to curb the games duopolists play, including requiring a first round of divestiture of six gigawatts in 1995 along with a price control for two years; encouragement of new entrant independent power projects; a second round of divestment along with the government permitting them as a quid pro quo to vertically integrate; and the replacement of the Pool with the New Electricity Trading Arrangements (NETA) in 2001.

The development of new plant by various new entrants (mainly US electric companies) and the second round of divestment when National Power and PowerGen disposed of 13 GW of plant reducing them to about 8 GW each, led in the winter of 2000/01 to competition breaking out. Wholesale prices collapsed for three years and virtually all of the merchant generation industry defaulted on loans and the government had to bail out British Energy. Most US companies returned home nursing losses, TXU Corp losing the most at $US4.2 billion ($AUD4.02 billion).

Along with this trauma the mass retail electric and gas markets were opened with 14 incumbent Regional Electricity Companies plus British Gas (owned by Centrica). Initially the market was competitive, but all that was to change.

NETA was not only economically illiterate, it placed a premium on both vertical integration and scale. Consequently, it was the first nail in the coffin of competition, along with the authorities’ relaxed attitude to consolidation. Over the period 1999 to 2006 the electric industry consolidated into an oligopoly of six major players, Electricité de France, RWEnpower, E.On (UK), Iberdrola (Scottish Power), Centrica, and Scottish & Southern. Four are continental companies not noted for their enthusiasm for competition. The oligopoly ultimately supplied 99 per cent of the residential customers and the majority of commercial and industrial customers; most of the independent suppliers exited the market and one or other of the oligopoly picked up their customers. And with the takeover of British Energy by Electricité de France at the beginning of 2009, the ‘Big Six’ generate 90 per cent of the electricity.

The final nail in the coffin has been greenery. In its Renewables Obligation Scheme; the British government devised the most expensive way of subsidising windmills by creating irrelevant risk (through the renewables market); adding it to another irrelevant risk (the European Emissions scheme, which has been ineffective in promoting investment in low carbon); and piling them both on top of an irrelevant risk from the gas-driven electric market price. So up goes the cost of capital. In consequence we got far less bang for our subsidy bucks than the Germans got from their feed-in tariff approach.

Former Prime Minister Tony Blair was enthusiastic to add savings the planet to his other unfortunately chosen global missions. In May 2007, without taking advice from either relevant political colleagues or civil service advisors, he committed the UK legally to achieving 15 per cent renewables for all energy usage by 2020 (up from a mere 1.5 per cent in 2005) under what became the European Renewables Directive 2009/28/EC. This target has been translated into 30 per cent renewables electricity production by 2020. Since the UK had almost the lowest level renewables in the European Union, the 2020 target has had three major consequences:

• it commits the UK to spend about a quarter of the total expenditure required in Europe to meet the target supposing other countries take it seriously;

• the main renewables resource in the UK is wind, and because we are a small and generally overcrowded island, much of the resource is supposed to come from off-shore windmills which are phenomenally expensive costing about £150/MWh plus the cost of off-shore transmission and strengthening on-shore transmission; and

• the renewables effort not only undermines the Emissions Trading Scheme because it floods the ‘market’ with subsidised product, it also undermines the electricity market

The electricity market is undermined in two ways. First, the achievement of targets for over-market and heavily subsidised wind, nuclear power plants and carbon capture sequestration plants which the government wants, replaces the market investment mechanism with de facto central planning. The traditional investment market is replaced by developers of low-carbon plant ‘competing’ to lobby to get their hands in customers’ pockets. Second, it extends further to impact on the gas plants that are required to back-up the windmills. So now the British Government is engaged in what it calls ‘energy market reform’ to devise subsidies for one and all.

The government’s green ambitions are alleged to cost £110 billion ($AUD168.58 billion) capex, which Citigroup has pointed out is beyond the capacity of the electric industry to fund and of the supply chain to provide the kit. The investment would also push up the price of electricity significantly. So far the modest costs have been folded into electricity bills as a stealth tax, but as the numbers of unsightly, enormous on-shore windmills increase (the latest is 465 feet high) on our crowded island, and as the phenomenal costs of the off-shore windmills come through to bills, people will realise what is going on. They will increasingly question why Britain – which produces 2 per cent of the world’s greenhouse gasses – is incurring vast amounts of money and squeezing people’s incomes on top of rising commodity and food prices and taxes, while China, India and others power ahead on coal (some exported from Australia). The last sentence of my book is, “In a decade or so will someone write a ‘History of the British electric industry – 2011 to 2020: the rise and demise of greenery’”?