England and Wales electricity supply industry from the time period of 1948 to 1990, was working as in the form of public ownership. The central electricity generating board (CEGB), which was the only organization present in that period responsible for all the activities ranging from generation of electricity to the transmission of generated electricity. CEGB was enjoying 'vertically integrated statutory monopoly'. There were other twelve area boards which were also worked as regional monopoly in distribution of electricity. There were several issues with CEGB as it was working with excessive capital costs, it was highly dependent on indigenous coal which was of high cost, also it was resulting in low return on assets and low productivity growth. Due to these issues the CEGB was restructured and privatized in the year 1990. At the time of privatization those twelve distribution companies were undertaken by private sector and re-established themselves by the name of Regional Electric Companies. On march 31, 1990, CEGB was restructured and divided into four companies. Among them three companies were stayed in the general public sector. This created a power pool and also resulted as a liberalize entry into electricity generation industry.
The three companies were National Power(later in the year 2000,re-established itseld with the name of RWE AG NPower), PowerGen (which was later bought by german company E.ON AG in year 2002) and National Grid. 'National Power' had generation capacity of 50% of the total capacity, 'PowerGen' inherited 30% of the total capacity. The remaining 20% of electricity capacity which was from nuclear plants was undertaken by Nuclear Electric. Thermal generation plant was taken by National power and PowerGen. The national grid company undertook the business of transmission electricity and was given the responsibility of operate and watch the 'power pool' which was on a daily basis. Here power pool means a market place where all electricity generating companies and distribution companies compete with each other for buying and selling of electricity. (R1 JSTOR). After privatization the electricity industry in united kingdom seen many important changes.
The nationalised industries in both conservative and labour governments had undergone huge losses. Previously The nationalised and privatised industries work on the basis of cost-plus contract culture. As then the workers of trade unions had created hurdles by demanding their fixed cost of their wages without satisfying output. This has resulted in overstaffing and encouraged poor labour efficiency. Through privatization government had managed to raise more than US$ 95 billion by the year 1995. Privatization also led to injection of new capital in the electricity industry for further expansion and new modern programmes were being undertaken by companies. The whole process resulted in enhancement of local industries and development of national economies that could serve the customer's choice. As now the electricity industry looks for adequate supply of electricity safely in comparison with demand by the customers rather than the pre- privatization terms which were based on just to maximize the returns. http://www.hkdf.org/newsarticles.asp?show=newsarticles&newsarticle=86 As also after restructuring, the labour productivity had increased more than double within the period of first six years, as previously the market was highly depend on coal for it's electricity generation but now the market was shifted to natural gas. At the time of privatization, the electricity which was generated by the fossil fuel using 92 percent of coal, 7 percent of oil, and a very small amount approximately 1 percent of gas.
But the trend within the next five years had changed as the sales of british coal fell to 30 million which was earlier selling 74 million metric tons of coal. By the year 1996, the percentage of gas used in generating the electricity also reached to 23 percent. With the use of less coal and the "dash for gas" resulted in reducing the emissions of dangerous chemicals like nitrogen oxide and sulphur dioxide. These are dangerous as they are both the main causes of acid rain and increasing global warming as they produces more carbon dioxide. With all the good effects, the privatization brought some bad effects too, as more demand for gas had resulted in declining of the united kingdom's coal industry. This had also adversely affected the employment in the coal mines, as the number of coal miners fell down to only 7000 by the year 1994 from 250000 miners working in coal mines in the year 1984-85. The government plans to construct more number of nuclear power stations were not incorporated due to decline of british coal industry. In the year 1994, the coal industry was also privatized. http://rru.worldbank.org/documents/publicpolicyjournal/124newbe.pdf
The electricity act 1989, brought a revolution in United kingdom electricity industry as it had got privatized and the ownership also changed to private from being previously to only state. This had made employees to transfer into new companies and also generated the competitive strength in U.K. electricity market. In the present market, Gas and Electricity Markets Authority which is commonly called as GEMA, is the regulator of all the gas and electricity related industries of Great Britain. The regulation in the industry is being carried out by an independent official body 'Ofgem', which supports the rules and regulations of GEMA. The power and duties of GEMA are provided for in law, some of which are the electricity act1989, the gas act of 1986, energy act 2004 etc. The authority has to regard many factors when carry out it's functions like, whether the demands of electricity and gas by the households are meeting with the supply, to proper check the activities related to finance done by the license holders, to also take care of the interests of disabled and the pensionable age individuals. These functions must be carried out with a view to supply electricity and gas safely, efficiently and for long time. The main goal of the agency is toward achieving sustainable development. According to keynote report, If we analyse the united kingdom electricity industry than it comes up as an robust industry in the short term but considering the longer term one has to mainly concern about the generation capacity and source of generation of electricity.
Keynote also states that the electricity in the near future could become expensive and could not meet the demand due to fast contracting primary fuel sources. https://www.keynote.co.uk/market-intelligence/view/product/10317/electricity-industry/chapter/5/industry-background As discussed earlier, the 1989 electricity act, generated competition in united kingdom electricity market. As the previous nationalised generators, distribution operators, system operators, suppliers had become privatized. The electricity runs through four basic activities in reaching to end consumer in the united kingdom electricity industry. First activity is generation ie, in generation of electricity at power stations mainly gas, coal and nuclear energy are used as a primary fuel. But also a small amount of electricity is being produced by wind power, solar power type of renewable sources. Whereas, another source, combined heat and power is also being used to generate electricity which contributes little to the total united kingdom's electricity generation. Large and rotating turbines of electrical machines are used in the process of generating electricity. On burning the input fuel generates the heat which provides power to these turbines. Power stations are the main location where most of the UK's heat is produced and then it is transmitted and distributed throughout. Also in some areas there is local on site generation of electricity happens. From the time of privatization there were only few companies as discussed earlier, but today There are many big companies in all four activities in united kingdom market. In generation of electricity there are big players like British energy group, RWE NPower PLC (before named as national power), E.ON UK PLC (after purchasing PowerGen company), AES group, Drax power ltd., International power PLC etc. Second activity is transmission ie, the long distance and very high voltage electricity transmission is done through 'national grid' company which operates and owns the system of transmission of electricity in England and Wales.
The purpose of transmitting electricity at high voltage is to reduce the power loss in long distance transmission. Scottish and southern energy public limited company take care of transmission of electricity in northern Scotland, Scottish power company covers all the southern Scotland and northern Ireland electricity company looks the northern Ireland region. Third activity is called distribution, there are several electricity distribution networks which delivers electricity to households and different local businesses. There is business monopoly of these electricity distributors in their allotted areas. In the electricity distribution business lager companies have acquired many small businesses and rebranded their activities. Major companies are, RWE NPower PLC, E.ON UK PLC, CE Electric, EDF energy, northern Ireland Electricity, Central networks etc. The last activity is supply, the supply of electricity to the final consumer is through suppliers which do several electricity generation activities on their own and also consumers can buy electricity through different marketing companies that do not have any direct contribution to any of the operation in generation of electricity. The major suppliers of electricity to the final consumer in united kingdom market are British gas which is owned by Centrica Plc, EDF energy, Scottish Power which is owned by Viridian group etc. https://www.keynote.co.uk/market-intelligence/view/product/2030/energy-industry/chapter/8/6-the-electricity-industry
Reasons for threats for electricity:
But, privatization also can't give full assurance that there can never be blackouts. As, on 27th may,2008 united kingdom faced it's blackout for some 30-40 minutes due to some technical problem in nuclear plant. It had caused delay in supply of commodities to around 500000 consumers. Later national grid managed to solve the problem. The embedded plants of combined heat power and wind power generation failed to serve at the time of blackout. Now the united kingdom market is assuming that the wholesale electricity prices will increase sharply, which shows the sign that the whole system is in stress. Besides the factor such as the cost of fuel, the main factor for the stress is lack of firm capacity. According to a report by renewable energy foundation, they found that the period from 2010 to 2015 will be a very fragile period for united kingdom electricity sector, due to the extreme overdependence on import of natural gas and continuously declining electricity generating capacity. These conditions will result in price shock and delay in supply of electricity, which will also harm the economy.( R MAIN MATTER). According to keynote report, if we consider the combination in fuel mix which is used to generate electricity in united kingdom, then in the year 2008, the main fuel that was having around 40.5% of share in the total fuel mix was gas with the quantity of 29.5 million tonnes, 39.8% is constituted by using 29.0 million tonnes of coal and 16.1% of 11.7 million tonnes of nuclear power.
While the rest 13.8% is constituted by different sources like oil, wind and hydro power to generate electricity. Final electricity consumption is increased from 336,218 GWh in 2003 to 339,914 GWh by the end of year 2008.https://www.keynote.co.uk/market-intelligence/view/product/10317/electricity-industry/chapter/4/market-size United Kingdom market is now very much dependent on gas which is economically and geopolitically a sign of danger. As by the end of year 2010, 50% of the gas used in generation of electricity will be imported by U.K. and that figure would go up to 80% in 2020. Their previous import countries like Norway which is increasingly becoming unwilling to export it's gas to united kingdom and also can only supply 15% of the total demand. As already mentioned that there are chances of increase in the price of electricity because the price of the gas and liquefied natural gas in atlantic basins will be going to set according to asian demand which will be more than double by the year 2020. It is predicted that Russia will be benefiting from these high prices and also at the time of constrained availability of LNG gas, Russia can use it's dominance over supply of pipeline gas in the regions of united kingdom and Europe for self interest. Thus, it is stated that the UK market between the period of 2010 to 2015 can face highly insufficient firm capacity with expensive gas which will lead to price shock and increasing the probability of blackouts. (R MAIN MATTER).
The reason for overdependence of united kingdom on imports is because the output of own united kingdom's gas fields is decreasing. Main importers of U.K. for gas are Norway, Russia, eastern Europe, Africa and middle east region. Many of these countries are either unstable or some are not having strong political relationships with united kingdom. This situation can act as a barrier in smooth supply of gas and could lead to sudden price increase in near future. https://www.keynote.co.uk/market-intelligence/view/product/10317/electricity-industry/chapter/7/strengths-weaknesses-opportunities-and-threats 2 factor: investment According to a report issued by OfGem, it stated that in the years to come united kingdom's open and competitive electricity industry could be failure in providing secure and sustainable supplies to the customers. One of the regulator calculated that the U.K. industry is in need for £200 billion investment by the year 2020, but the operating companies in the industry may require stronger incentives before they set any target to reach to that level of funds. This would lead to uncontrollable effect on price which will be unaffordable for many consumers to use a larger amount of electricity. Ofgem also predicted that by the year 2020, the annual electricity and gas bills of average household would go upto £2000 which will be 25% rise from today's bills. http://www.ofgem.gov.uk/Consumers/CCI/Pages/ProjectDiscovery.aspx
British nuclear watchdog have admitted within the last past seven years there are more than 1,750 leaks and breakdowns in the plants. While investing united kingdom government has to consider the issue of climate change as it has set the target to reduce green house gases by 80% by the year end 2050. The government can reduce these gases only by using renewable sources like wind and waves in generation of electricity instead of using fossil fuels like oil and coal. But, according to a report given by royal society mentioned, that the government's progress in producing electricity through new methods like wind turbines, solar panels is very low and soon to be improved. the government will require huge money to be invested in which they will take from the energy companies in the form of taxes and incentives. And energy companies will cover their cost by charging more to the final consumer. But, still the investment by the government is necessary as it will lead to increase in more cost if it would continue to use fossil fuel as generation of electricity because of the continuously increase in prices of oil and coal. According to professor Shepherd, government in united kingdom has failed in finding new ways of generating electricity and investing in new technology. But, now the industry could develop itself more by recruiting engineers and experts from different foreign countries. http://www.telegraph.co.uk/earth/earthnews/5688210/Households-face-rise-in-bills-because-of-Government-failure-on-renewables.html
According to Keynote report, if there would not be any investment plans for replacement of some of the existing plants, then in the near future united kingdom will face the blackout situation as there will be shortage of power generation capacity. Currently, the production of electricity in united kingdom is around 76 Gig watts (GW), but as more number of existing plants are closing down due to technical problems as they are very old, and there is requirement of new plants of around 20 GW to 25 GW by the end of 2020. There are many reasons of generating capacity being lost during this period, as within the next 10 years some of those fossil fuel power stations which are old will stop working. By the year 2015, around nine of the existing the coal and oil fire plant having capacity of generating 8.5 GW will be close down. This is due to comply on the terms and conditions of Large combustion plant directive, which is a European union directive that aims on limiting pollution. Among all the other, there are some nuclear power stations having capacity of 7 GW are already planned to close down by 2020. Among total generation of electricity in united kingdom, around 20% is generated from nuclear reactors but within period of twenty years that figure will reduce down to 6% because of more ageing plants will be closed down. To meet the increasing demand of electricity, around one third of current capacity by different mediums have to replaced by the end of year 2020.The government is in favour to use nuclear power plant in producing electricity because it produces less of carbon emission. But, the construction of these new plants are scheduled to start in 2013/2014 and they will be fully in operation by the end of 2017. Recently some companies like EDF, RWE and E.ON UK have secured land at Oldbury and Wylfa with the purpose of developing nuclear power station. Some amount of investment is also necessary to maintain and upgrade the existing transmission electricity network in united kingdom. https://www.keynote.co.uk/market-intelligence/view/product/10317/electricity-industry/chapter/9/current-issues
One major issue with government is how to encourage the operators within the industry to built more cleaner generation of electricity. There is continuous pressure from European union as it is watching the whole electricity generation process and if any producer breaks the EU emissions trading scheme, then EU will put penalty on that producer. European union had already given notice to Britain to shut down those coal and oil plants which are old, dirty, and not presently efficient as soon as possible. If UK wants to achieve it's target on reducing CO2 emission, then it should use the EU scheme to encourage companies to build new power generation stations having low emission. Out of the target of supplying total electricity from which 10% will be generated renewable sources, but it is currently able to supply only 2% of it. The united kingdom market set the target of generating 15% of electricity from renewable sources by the end of 2015. Whereas, European union has decided to encourage the use of renewable sources as by the year 2020, it will be compulsory for all the regions to produce at least 20% of all energy using renewable sources, thus it also created an issue in united kingdom market. http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article1813006.ece
The regulator OfGem of the united kingdom electricity industry proposed that there is a need for radical reforms as in that a state controlled body should be made through which consumers can buy gas and electricity. The radical reform is necessary as the old free market approach in supplying of energy and electricity is not working properly. Due to the credit crunch, there are no longer huge funds available with banks causing companies to delay their investments in new power plants. To cope up with this problem OfGem has also proposed to put a minimum quantity of supply of electricity obligation on to the companies supplying and generating electricity to make sure that in the near future the lights don't go off. The regulator mostly focussed on the idea of setting up a central energy buyer, which would be somewhat similar to the old 'central electricity generating board', which was abolished at the time of privatization. Currently most of the power plants in united kingdom are owned by the major 'big six' energy companies, which are Centrica, Npower, Scottish and southern, E.ON company, Scottish power company and EDF. Big companies like EDF and E.ON UK have predicted that around plants having 30 GW capacity, mostly coal plants will end up by 2016. Critics if the industry have argued that there is lack of transparency in the industry and these companies are making excessive profits. Only the central governance body would stop the dominance of the big companies, by selling electricity at fix rates to customers. But, the big six companies are not in favour of these radical changes.
http://www.guardian.co.uk/business/2010/feb/03/ofgem-uk-energy-supplies Candila Whitmill stated that, the energy gap that is being build in the market has severe economic consequences. If there will not be any urgent release of the energy policy then the credit crunch would badly affect the united kingdom's energy industry.as discussed earlier there is a need for money every where, as in to cope up with climate change, in protection of environment, to built a low carbon economy. A report identified that if the current situation of market keeps on going then there will be only one operational nuclear reactor left by the year 2023. According to energy white paper in 2007, the government showed interest in setting of new nuclear power stations, but their current strategy failed to address on the issue of short fall in electricity in short term. None of the measures announced by the government was for overcoming the issues predicted in forthcoming short and medium term but, was more concerned towards long time issues. Fells who is a professor observed that the government can do some measures quickly as it could lay another electricity transmission line to france, Norway and germany. This would connect united kingdom more strongly to the European network and will give more security and comfort to the users in U.K. If these decisions can be quickly made then, these measures can be implemented within next three years.
If we consider united kingdom's electricity generation capacity through wind, then it is concluded that currently in united kingdom only got 3.2 GW of wind turbines. According to a projection given by national grid, that by the year 2020, there will be around 19.4 GW of offshore wind and onshore wind will be around of 12.9 GW, giving 98TWh of power. In a report came in 2008, stated that, UK electricity system is under threat between 2010 to 2020. There is urgent two additional development of wind power generating plants to meet demand of electricity. One is development of high voltage interconnections with countries such as Norway, Netherlands, France and Germany as that would give permission of trading surpluses and deficits of wind power. Second is deployment of all the types of onshore electricity storages that are widely distributed.
Conclusion: Alistair Buchanan, a chief executive in Ofgem in an interview with BBC told that, currently ofgem is looking for new ways to maintain the smooth flow of supply from several unpredicted challenges of credit crunch, carbon prices and maintaining international supplies. Ofgem suggested many ways in solving the above problems like encouraging more investments "green" technology by setting a minimum possible price of carbon, different demonstrations can be given to suppliers to cope up with supply threats, more tenders for electricity generation through renewable sources as in the long period that will guarantee minimum return to the investors, making suppliers to bid for electricity by the mode of auction and not through any contract with the generator. Nick Winser working in national grid company told that there is a need for reformation of market arrangements and low carbon investment to supply electricity in the most secure and affordable way to fight the big challenges in near future. Ofgem as the regulator in the electricity industry which is suppose to execute all the policies of government, is now urging government to make such policy which could result in energy security. The regulator needs to watch that the fuel prices are being fairly set and make sure to stop the exploitation of vulnerable customers by the energy companies. The main factors responsible for such a situation that someone could think of black out in united kingdom is because lack in generating capacity, low level of investment that cannot bring new generating capacity. Also most of the old nuclear plants and coal plants are on their end of product life. http://news.bbc.co.uk/1/hi/business/8494899.stm