Electric Power Industry in the UK - Case Study Example

RUNNING HEAD: BUSINESS ENVIRONMENT First, Middle, Last) Admission Number: Lecturer: Date of Submission: (Dd, mm, yyyy) PEST analysis on recent business environment changes for the electric power industry in the United Kingdom PEST analysis in electric power industry in UK entails a scan of external macro-environment factors within which the industry operates and can be expressed in terms of the below factors: Political Economic Social Technological It describes the framework for evaluation of these macro-environmental issues. A PEST analysis fits in the entire environmental scan as shown in diagram below: Diagram 1     Environmental Scan           /   \ External Analysis     Internal Analysis     /                       \   Macro environment  Micro environment      |   P.E.S.T.        Political Factors Political factors involve governments’ legal issues and regulations both formal and informal regulations under which the power industry in UK functions (DTI, 2001). Some examples include: employment laws trade restrictions and tariffs tax policy environmental regulations political stability Economic Factors Economic issues influence the purchasing power of potential clients and the industry’s cost of capital (Electricity Association, 2001). Below are examples of issues in macro economy: interest rates inflation rate economic growth exchange rates Social Factors Social issues involve the cultural and demographic aspects of external macro environment (DTI, 2006). These issues influence the size of potential markets and customers’ requirements. These include: population growth rate career attitudes health consciousness age distribution emphasis on safety Technological Factors Electricity Association (2001), Technological issues may reduce barriers to entry, minimize the lowest efficient production levels and affect the outsourcing decisions. Some of the technological issues in UK power industry include: automation rate of technological change R&D activity technology incentives Regulation and structure of electricity industry in United Kingdom changed considerably after 1998 with involvements like competition in electricity supply, new electricity trading arrangements (NETA) and Utilities Act 2000. The Act introduced the energy watch (independent arrangements representing customers), plus Electricity and Gas Markets Authority which controlled the duties and powers of Director General. The pre-privatization organization of electricity in United Kingdom is symbolized by broad vertical integration of production, transmission, distribution and its supplication (DTI, 2006). For instance, the structure of nationalized industry in Wales and England was control by one huge production and Transmission Company called CEGB which sold electricity in mass to 12 area distribution boards. Each of them served a franchise or a closed supply area. In Scotland, existed two vertically integrated boards that practiced regional monopolies though they cooperated nearly in utilization of their producing plant into ensuring that the demand was catered as viewed in the figure below: Figure 1 Structure for the nationalized electricity supply industry Figure 2 Structure of privatization electricity industry The electricity pool One of electricity innovation sector at privatization was the building of electricity pool of Wales an England (DTI, 2006). The pool become one of initial mechanisms of its type and thus, there involved little experience on other countries to rely on its creation and regulations connected with it. In its establishment, considerable weight was offered to arrangements functioned pre-privatization by CEGB, the time when electricity system was publicly-owned and centrally organized. Electricity Association (2002), after the first increase in numbers of licensed electricity suppliers functioning in electricity supplying market, the modern increase in acquisition and merger practices proposes the trend toward consolidation of electricity supply market. Electricity Association (2002) points onto the lowering prices and relentless competition, since spurring on companies gets a chance of consolidation to ensure they become more competitive (Electricity Association, 2001). There has been the recent trend into integration of production and supplication in recent years. In July 1998, Powergen purchased East Midlands Electricity as National Power purchased Midlands Electricity supply business. After the National Power made a decision of demerging into Innogy and International Power, Innogy started extending its supply business and got Yorkshire’s supply and Northern Electric’s supply businesses in February and November 2001 respectively. Figure 3 The main supply groups currently functioning in the UK electricity market Through the attainment of Midlands, Northern and Yorkshire Electricity supply businesses, Innogy has added its customer base becoming the biggest supplier with the market share of 19%. British Gas Trading becomes the second biggest supplier followed by TXU and Scottish and then the Southern Energy. Regulatory reform (Utilities Act 2000) Utilities Act 2000 got Royal Assent March 2000 and greatly changed both the institutional frameworks for electricity industry regulation and legislative parameters determining the arrangement of that industry (DTI, 2006). With consideration to institutional alterations and regulatory frameworks, the Utilities Act made offerings for: the replacement of an individual regulator, the director general of electricity supply, with a regulatory board, the Gas and Electricity Markets Authority; New powers for regulatory authority and secretary of the state Alterations in basic duties of Secretary of the state of Industry and Trade and regulatory power and move in duties amidst the secretary of state and also Ofgem Replacement of former electricity production committees with independent electricity and gas consumer council also called energy watch Merging of regulatory offices for electricity and gas sectors into a common regulatory office, that is the office of Gas and Electricity Markets (Ofgem). INDUSTRY AND MARKET STRUCTURE The sector separately offers the description of structure of electricity industry in Wales and England, Northern Ireland and Scotland. Factors taken into consideration entail the nowadays market structure, contractual arrangements catering those in relationships and relationships amidst various players (Electricity Association, 2002). Figure 4 The structure of electricity industry in Wales and England Wholesale market NETA (New electricity trading arrangements) founded on bilateral trading between producers, suppliers, traders and also customers were produced on March 2001 replacing electricity pool as the wholesale market in Wales and England. The current arrangements function like other commodity markets and makes offering for electricity system to be put in physical balance all the time to maintain and quality and security of supplication. NETA is formed of below elements: Short-term power exchanges which give participants the opportunity to ‘fine tune’ their contract positions in a simple and accessible way; Settlement progress for settlement of accepting the balancing techniques which gives offers and bids recovers the SO’s expense of balancing the charging and system participants which its contracted positions does not match its metered electricity volumes. The balancing mechanism opening at the gate closure of 3.5 hours before the real time whereby the NGC as the system operator (SO) accepts the offers and bids of electricity to ensure its balance during transmission system. Forwards and futures the markets that enable contracts of electricity to be struck up to various coming years. Figure 5 Diagrammatic representation of NETA Electricity Association (2001), Under NETA, the mass of electricity is dealt forward and futures and the short-term markets via the bilateral contracts. These markets give room for contracts of electricity to be struck over the scale of time ranging from a day to many years ahead enabling its participants to secure its cover to their probable output or need at competitive costs (Electricity Association, 2002). Only minute volumes of nearly 3% of the whole energy traded via the balancing system utilized by the NGC towards its balancing systems. Supply NETA enabled supplication businesses in bulk and selling to customers. This was achieved by ensuring suppliers contracts with producers in bilateral and met their own contracted needs. Suppliers are needed to forecast their own requirement to face strong commercial incentives under Balancing and Settlement Code. This ensures balancing their own portfolio via their contracts. The Utilities Act 2000 eliminated utilization of PES and second tier licenses alongside bring a Great Britain-wide license giving entire suppliers to supply customers nationwide. The act also ensure provision of supply and distribution activities separation, needing separation of former PESs distribution and supply businesses and getting these practices to be disjointedly licensable. Thus, the entire suppliers are currently on the similar legal footing and distribution practices of former PESs who have become separate businesses. Due to their dominance in their supplication services areas, the former PES authorized areas, and ex-PES suppliers have continued to get particular additional commitments in their licenses. These unique conditions involve the requirement to ensure available prepayment meter payment infrastructure in supplication service areas. Scotland The Scottish electricity industry has a combined arrangement prior to privatization which continued after vesting (DTI, 2006). Two companies, that is Southern and Scottish Power energy was created from the Scottish Hydro-Electric and Southern Electric. These cater for entire electricity provision from electricity production, transmission and also distribution into its supplication. Southern Energy and Scottish & and Scottish power have also access to one another producing capacity under the long-term contracts which are put into location at privatization to give companies with a more balanced plan. The third main company which functions in Scotland, British Energy is the nuclear producer contracted for full output of its Scottish nuclear plant into other big two companies until 2005. Electricity Association (2002), Electricity market in Scotland has been considerably stable over the past decade with the small level of compensation in production and rather more in supply from Centrica, who trade as Scottish and other suppliers. Figure 6 Structure for electricity industry in Scotland Electricity Association (2001), The Nuclear Energy agreements put privatization into place and offer the sale of entire British Energy’s output in Scotland into Scottish Power Production Ltd (74.9%) and SSE production ltd (25.1%). Scottish Power and Southern and Scottish Energy plan production in their own areas from plant available to them, deals with contracts or owned. The Scottish Power’s own production capability comprises the two big coal-fired plants, wind turbine, hydro plant totaling 4,050 MW (Hicks, 1998). The production portfolio owned by Southern and Scottish Energy comprises comprising the gas-fried Peterhead plant, with the big number of wind turbine and hydro plants amounting into 2,888 MW. All the companies have as well invested in production capacity in Wales and England. The British Energy’s two Scottish nuclear power stations offer the big of base load in Scotland, accounting for almost 50% of its output. Southern and Scottish Energy’s Peterhead power station offers the mid-merit whilst the Scottish Power’s coal-fired stations play the part of Scottish producers. Northern Ireland The organization of electricity industry in Northern Ireland is a bit differing from that in Great Britain. Practically, there are two partially interlinked market structures as shown below. On the other hand, there exist the franchises or non-competitive market privatization set up which limits trade in electricity production even though gives room for any licensed supplier to sell their electricity to end customers in Northern Ireland (Hicks, 1998). For franchise or non-eligible customers with currently 65% if market by volume, producers being needed to sell its output to power procurement business (PPB) of the Northern Ireland Electricity (NIE) upon being customers are supposed to buy electricity from the PPB, either via NIE’s supply business or second-tier supplier. Figure 7 The structure for Northern Ireland electricity industry Figure 8 Institutional framework of electricity regulation industry in Great Britain Price controls The purpose of the price control is where there is a lack of competition, to protect customers and to encourage an efficient industry (Hughes, 1983). In the UK electricity sector, as for other UK utility privatizations, price controls have taken the form of a price cap set by the regulator (Electricity Association, 2002). Electricity industry is basically controlled by Gas and Electricity Market Authority, the body which is formed of chair and other ten members. The body is financed by non-ministerial government department, Gas and Electricity Office Markets (Ofgem). Reference DTI, 2006, Digest of United Kingdom Energy Statistics. Retrieved from http://www.decc.gov.uk/assets/decc/statistics/publications/dukes/dukes06.pdf Electricity Association, 1999, The UK Electricity System. Retrieved from http://www.u-ol.co.uk/Data%20Sheets/Intro_UK_Elec_Ind.pdf Electricity Association. 2002. Electricity Industry Review. Retrieved from http://www.bath.ac.uk/management/cri/pubpdf/Industry_Briefs/Electricity_Gillian_Simmonds.pdf Green A, 2000, The New Electricity Trading Arrangements, PricewaterhouseCoopers. Hicks C, 1998, Regulation of the UK Electricity Industry, CRI. Read More