N' Keith Tovey, M'A' PhD, C'Eng MICE

1
Recent Changes in the Electricity Markets in the
UK
Third International Conference. Operational
Experience and Practice of European Electricity
Markets. Moscow 26th May 2004
???????????? ????????? ??????
N. Keith Tovey, M.A. PhD, C.Eng MICE
Energy Science Director Low Carbon Innovation
Centre University of East Anglia, Norwich
2
Recent Changes in the Electricity Markets in the
UK

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

3
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Electricity Generation and Supply
• differences in approach between England / Wales
  and Scotland.
• ????????? ? ???? - ??????? ????? ?????????

• Fuels used for generation
• ???????, ???????????? ??? ?????????

4
The Generation and Distribution of Electricity
has always been different in Scotland compared to
England and Wales (????????? ?????? ??????????
?? ?????? ? ?????? ????????????? ? ??????????????
?/? )
England and Wales (?????? ? ?????) One
Generating Company (CEGB) and 12 Regional
Electricity Suppliers (???? ???????????? ????????
(CEGB) ? 12 ???????????? ???????????). CEGB did
NOT supply electricity to consumers
England and Wales ?????? ? ?????
5
Structure of Electricity Supply in early 1990s
Scotland ?????????

• Scotland
• Vertical Integration
• two companies

England and Wales 12 Regional Supply Companies
also Distributed Network Operators.
6
Most Generating Capacity is in the North - most
demand is in South ?????????? ????? ????????????
?? ?????? - ??????????? ?? ???
Generating Capacity Surplus/Deficit ???????/??????
? ?????? ???????????? on February 12th
1800 (??????? 12, 1800) ve generating
capacity exceeding demand (???????????? ?????????
???????????) -ve demand exceeding generating
capacity (??????????? ????????? ????????????)
MW
7
Changes in Fuel Use in Electricity Generation

• Coal Generation
• reduced by 80 by 2002
• rose by 5 in 2003

• Gas Generation
• rose rapidly to 2002
• fell by 5 in 2003

Source Digest of UK Energy Statistics 2003
8
Electricity Generation - pre 1990 ????????????
?/? - ?? 1990

• Decision on how electricity was to be generated
  was done on a generating set basis
• (???????????? ?/? ?????????????? ????????
  ????????? ?????????
• Sets to run were selected on Merit Order Based on
  Marginal Costs (???????? ?? ???????????? ?????)
  (i.e. the fuel costs - ???? ?? ?????)
• Some generating sets were run OUT of MERIT ORDER
  where system constraints were an issue.
• Generators sold electricity to Regional
  Electricity Boards (????????????? ????????? ?/?
  ???????????? ????????????? ?/?)
• Electricity Boards sold to consumers in their
  Area only
• (???????????? ???????????? ???????? ?/?
  ???????????? ?????? ????? ???????)
• Prices to consumers varied between regions
• (???? ??? ???????????? ????????????? ?? ????????)

9
Privatisation of Electricity Supply Industry 1990
???????????? ? ??????? ?????????? ? 1990
Central Electricity Generating Board ???????????
National Power ???????????? ?????????? PowerGen
Nuclear Electric

• Coal (????????) Fired Power Stations
• Oil (????????) Fired Power stations
• Gas Turbine (?????? ???????) Stations
• Hydro Stations (???)
• Nuclear Stations (???????)
• Transmission (???????????)

National Grid Company ???????????? ???????
????????
12 Regional Electricity Companies (12
???????????? ?/? ????????)
12 Regional Electricity Companies 12
???????????? ?/? ????????
10
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

11
Recent Changes in the Electricity Markets in the
UK

• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????

• Changes in Structure of Supply Companies

• The Electricity Pool
• ????????????? ???

• Deregulation

12
Scotland
England and Wales
13
????????????? ??? A Review

• Only Generators bid into POOL and thereby set
  price.
• Need for strong Regulatory Body to ensure prices
  were not fixed.
• Evidence suggested price manipulation took place
  in early years.
• Regulator required major generators to dispose of
  some stations.
• The lack of Demand Side Bidding was a weakness
• Charges for Transmission Losses were averaged
  over whole Network.

• Customers in North subsidised those in South
• Generators in South subsidised those in North

14
Changes in Regional Electricity Companies in the
1990s

• Take-over
• Scottish Power takes over MANWEB

1990

• Vertical Integration
• nPower acquire Midlands
• PowerGen acquire East Midlands

United Utilities

• United Utilities formed
• in NORWEB area

PowerGen
nPower

• Mergers
• Scottish Hydro Southern become Scottish
  Southern

c. 1998
15
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

16
The Supply of Electricity since 1990????
?????????????? ? 1990

• Large Consumers (gt 1 MW) ???????
  ???????????

• Before privatisation
• Could only purchase from the Local\Regional
  Electricity Company (REC) supplier in their
  region

• After privatisation
• Consumers gt 1MW could purchase from ANY REC not
  just their own regional Company (second tier
  RECs).

• 1994 Threshold reduced to 100 kW
• 1998 - 1999 All domestic consumers included.

17
The Supply of Electricity since 1990 ????
?????????????? ? 1990

• Domestic Consumers ??????? ???????????
  (?????????)

Transition Arrangements to 1998 ???????? ?
?????????? ??????? ?? ?????? ?? 1998
Prices to Domestic Consumers were regulated
according to the formula RPI - X E F
RPI is a measure of inflation X was a factor
set by Regulator - initially 5 but later
reduced. E was an energy conservation factor F
was a levy designed to promote exploitation of
Renewables
18
Effects of Privatisation and Deregulation on
Energy Prices

• Deregulation in Domestic Market
• 1996 - 1998 for Gas
• 1998 - 1999 for Electricity

Domestic Consumers ??????? ???????????
(?????????) ????????? ?????? 1998 7.48p (3.74
Roubles) per kWh gtgtgtgt 2003 5.62p (2.81
Roubles) per kWh 2004 6.20p (3.1 Roubles) per
kWh
Source Energy Sector Indicators Department of
Trade and Industry
19
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

20
????? ??????? ??????? ???????? ????

• The basic principles ???????? ????????

• Both Generating and Demand Side Bidding Takes
  Place
• Most Electricity (gt90) is traded outside NETA
  Balancing Mechanism on a futures market
• NETA favours generators and suppliers who can
  guarantee specific levels of generation/supply of
  1 hour in advance.
• They are fined if they deviate from their
  contract position.
• NETA favours generators and suppliers who can
  guarantee flexibility in output / demand at short
  notice via the Balancing Mechanism ?????????????
  ????????

21
????? ??????? ??????? ???????? ????

• The basic principles ???????? ????????

• Generators and Suppliers are penalised if they
  deviate from their agreed level of generation /
  supply.
• If a generator has TOO MUCH generation, or a
  supplier has TOO LITTLE demand, they are
  penalised at the System Sell Price.
• If a generator has TOO LITTLE generation, or a
  supplier has TOO MUCH demand, they are penalised
  at the System Buy Price.
• Usually, the SYSTEM SELL PRICE is less than the
  System Buy Price .

22
????? ??????? ??????? ???????? ???? How well has
it performed since starting on 27th March 2001?
The System Sell Price and System Buy Price have
converged with time
23
????? ??????? ??????? ???????? ???? How well has
it performed since starting on 27th March 2001?
In last 12 months wholesale prices have risen and
are now higher than at start of NETA
24
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

25
Changes in Structure of Supplies Companies in
last 4 years

• Electricité de France (EDF) acquire London
  and SEEBOARD

Only in Scotland has their been no change in
ownership
26
Distributed Network Ownership in 2004
27
Recent Changes in the Electricity Markets in the
UK

• A brief review of structure of the UK Electricity
  following privatisation in 1990.

• Changes during the 1990s

• Deregulation

• New Electricity trading Arrangements
• ????? ??????? ??????? ???????? ????

• Changes in Structure in last 4 years

• The Future

28
Future Changes in the UK Electricity Markets

• The BETTA System - Spring 2005
• The British Electricity Transmission and Trading
  Arrangements - will bring Scotland into the NETA
  system.
• Many issues relating to differences in
  distribution and transmission and use of the
  Interconnector still have to be finally resolved.

• Renewables Obligation - 2002 - 2015
• is likely to see a rise in electricity prices

• Carbon Emissions Trading (from 1st January 2004)
• is also likely to see a rise in electricity
  prices - however, final allocations have still
  to be resolved. Electricity Supply Industry will
  be SERIOUSLY affected 16 reduction over 3
  years.

29
Future Changes in the UK Electricity Markets

• Renewables Obligation
• Requires all suppliers to provide a minimum
  percentage of electricity from New Renewables.
• In 2004 - 2005 the percentage will be 4.9, but
  less than 3 is being achieved.
• Suppliers are fined at 3.139 p per kWh (1.57
  Roubles) per kWh for any shortfall.
• This is introducing a new market in the trading
  of Renewable Obligation Certificates - issued as
  proof of generation.

30
Renewable Obligation Certificates
The Regulator OFGEM
Renewable Generator
SUPPLIERS
Trader and Brokers
31
Renewable Obligation Certificates

• 12 - 18 per MWh Recycled fines

• 1.50 per MWh Embedded benefits - less losses

• 4.30 per MWh Climatic Change Levy

• 3.139 per MWh Value of ROC

• 20 - 22 per MWh Wholesale Electricity Price

Less Neta Imbalance charges 2 per MWh
Value of Renewable Generation 56- 70 per MWh
i.e. 2.5 to 3 times of normal price.
32
Conclusions (1)Key Changes in Electricity Market
in UK

• April 1st 1990 Privatisation Electricity
  POOL Established
• Large Consumers benefit from Deregulation
• 1994 Intermediate Consumers benefit from
  Deregulation
• 1998 All Consumers benefit from Deregulation
• 27th March 2001 NETA replaced POOL
• 1st April 2002 Renewable Obligation comes into
  force
• 1st January 2005 Carbon Emission Trading
• Spring 2005 NETA extended to Scotland as
  BETTA.

33
Conclusions (2)Key Changes in Electricity Market
in UK

• Prices to consumers fell by 20 as a result of
  Deregulation.
• Wholesale prices of Electricity fell by 40
  between 1998 and 2002, but have risen sharply in
  last 12 months and are now at (or above ) pre
  NETA levels.
• Most electricity gtgt 90 is traded outside
  Balancing Mechanism Trading
• NETA favours Generators / Suppliers who can
  guarantee output / supply in advance or who can
  be flexible to make guaranteed adjustments during
  Balancing Mechanism Trading.

34
Conclusions (3)Key Changes in Electricity Market
in UK

• All Regional Companies in England and Wales have
  changed hands at least once since Privatisation.
  Neither of companies in Scotland have changed.
• In only 5 areas is the Regional Company still the
  Network Operator
• Three-quarters of the Regional Companies in
  England and Wales now have parent companies in
  France or Germany
• Renewable Obligation Certificates are trading 50
  above face value and is starting to become
  important in the Electricity Market
• Carbon Trading in the UK is requiring a 16
  reduction in emissions from the Electricity
  Sector in the next 3 years.

35
Recent Changes in the Electricity Markets in the
UK

• This presentation is available over Internet at
• www2.env.uea.ac.uk/gmmc/neta/NETA.htm

• For further information on the POOL and NETA see
  paper given at last years conference -
• The Changing Face of the Electricity markets in
  the UK
• This is also available at the same WEB address

36
?.?.???? ?.?., ?-? ??????????? ???? ?????????
????????????? ???????????? ????????????
????????? ??????
k.tovey_at_uea.ac.uk
Energy Science Director Low Carbon Innovation
Centre
School of Environmental Sciences University of
East Anglia Norwich NR4 7TJ