KN40014

KEY NOTE REPORT : Electricity Industry : April 2004

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This report covers: electricity industy, generation, transmission, distribution, security of Gas supplies, terrorist attacks, reliability of electricity services, renewable energy, nuclear energy,

Companies covered include: British Nuclear Fuels, CE ELectric, Centrica, EDF Energy, Midlands Electricity, National Grid Company, Powergen, RWE Innogy, Scottish and Southern energy, Scottish Power, United Utilities, Viridian Group, Western Power Distribution Holdings, AES, Edison Mission Energy, TXU Europe,

TABLE OF CONTENTS

EXECUTIVE SUMMARY

This Key Note Market report analyses the UK electricity industry in terms of generation, transmission, distribution and supply. Final electricity consumption in 2002 was 332,780 gigawatt hours (GWh), with the highest demand coming from the domestic sector (34.4%), industry (33.6%) and the commercial sector (21.9%). Within the industrial sector, the highest users were the chemicals, food and beverages, and paper and printing industries. Electricity demand as measured by the transmission system operator in England and Wales in 2003/2004 was estimated to be 315.9 terawatt hours (TWh) and Key Note estimates that demand for the whole of the UK was 357.8 TWh.

In terms of sales, the market was worth £14.35bn in 2002. Several factors are influencing the market, the greatest of these being the recent opening up of the market from a vertically integrated nationalised industry to a competitive market in which companies participate in the generation, distribution and supply of electricity. The UK market now operates on the basis of agreements between generators and suppliers, with any mismatch between these being compensated for by a balancing mechanism from the transmission system operator. Electricity generation increasingly depends on gas as its source of prime energy. Current issues of particular note include security, in terms of both future gas supplies and possible terrorist attacks on electricity installations.

As the UK's indigenous supplies of gas become depleted, future power-station gas supplies are likely to be sourced from Russia, North Africa and other countries with political regimes that have not always made them natural trading partners with the UK. As a result of New Electricity Trading Arrangements (NETA), wholesale electricity prices have dropped, causing some companies to seek an exit from power generation. There is concern that the margin of spare generation capacity in the UK is now insufficient to ensure a future reliable performance of the whole industry. Overseas companies now have a substantial stake in the UK electricity industry.

The market will continue to develop, with the amalgamation of the transmission systems in England and Wales and those in Scotland producing a transmission system for Great Britain. Renewable energy is an important part of government energy strategy. Wind farms in particular will become a major contributor to government targets and this sector is now receiving large investments.

Energywatch, the energy watchdog, is working on initiatives to ensure that customers are not subject to energy marketing abuse. Demand is forecast to continue rising, in line with population changes, increasing use of electrical appliances and developments in the UK infrastructure.

Text © 2004Key Note

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Last updated by Amanda Porteous June 2004