October 2005

LSI News Updates

Ever Rising Prices
Since October 2003 UK consumers have experienced rapidly rising energy prices. The effect of these rises on businesses, the public sector and domestic consumers has been dramatic. The cause has been an unprecedented increase in the wholesale price of gas paid by UK suppliers.

Ofgem has estimated that over the winter of 2004/2005 alone, consumers in the UK paid £5.2billion more for their gas and electricity that they had the previous year. Prices this winter 2005/2006 could be in the region of 45 % dearer than last winter.

A number of explanations have been put forward as to why the wholesale price has risen so steeply.

• Gas supplies from the North Sea have declined faster than expected, though there are still significant reserves.
  
  
• Due to various economic reasons, the price of oil has soared in recent years and with the price of gas linked to oil, this has had a knock-on effect on the price of gas in the UK.
  
  
• Import and storage capacity in the UK is inadequate and has therefore has not been able to offset declining North Sea production. It has recently been argued that the UK has much less long-term gas storage than many European states, 11 days worth as opposed to up to 80 days elsewhere in Europe. A public enquiry has recently been raised into proposals for Britain's single biggest onshore gas storage project, proposed by the Texas based independent energy company Canatxx.
  
  
• Because gas is used to produce 40% of our electricity, the price of electricity has risen dramatically as a result. According to the governments own forecasts, a failure to build new nuclear stations would leave the UK dependent on gas for more than 60% of its electricity by 2020 and with our own depleting supplies this would mean that we would become more dependent on imported gas, obviously at a cost.

In reaction to the continual price increases, energy users have demanded regulatory intervention to block further mergers of gas and power suppliers on the grounds that consolidation is also a major contributory factor to the recent surge in energy prices.

With the recent bids for Scottish Power from Centrica and Eon in the news recently, one could argue that vertical integration has already gone far enough. With current market consolidation, are we already suffering from the effects of reduced competition?

EDF Energy staff threaten action
Blackouts could threaten the south east of England as distribution workers EDF Energy prepare to either work to rule or ballot over industrial action in support of pay claims.

Drax rejects £1.9bn bid
The owner of Britain's largest power station has rejected a second bid from International Power and Mitsui worth £2 billion, last month it rejected a £1.9 billion offer from one of America's leading energy groups Constellation Energy, claiming that it undervalued the company and had no certainty of delivery.

The company behind the coal-fired Drax plant in North Yorkshire, produces 7 per cent of the the UK's electricity and employs in the region of 560 staff in the UK at its site near Selby.

Centrica supply strategy
Centrica stepped up its efforts to supply more of its customers from its own power stations after completing a £150 million deal with Total. Centrica, the owner of British Gas has increased its stake in the South Humber Bank power station from 60 to 100 per cent, seeing this as a significant step to increase the amount of generation it can call on to supply its customer base.

Water
This autumn will see the implementation of new arrangements in the water industry that will allow the competitive supply of water to large non-domestic users.

The arrangements to be implemented on 1 December bring competition to all non-domestic users in England and Wales consuming at least 50 megalitres (Ml) of water a year, reducing the existing threshold from 100Ml in England and 250Ml in Wales, doubling the number of customers that can benefit from competition to around 2200. Although the programme still only delivers a limited expansion of the existing competition threshold it will provide far greater flexibility for customers who will now have the choice to buy from an integrated water company or a specialist water retailer and will provide a platform for extensive water competition in the future.

Nuclear Option 20 years off
Britain will not benefit from a new programme to build nuclear power stations until at least 2025 and that's if the government give the OK to begin building plants next year! In the meantime both households and businesses can expect their energy costs to continue rising steeply unless the Government can act to speed up the planning process. At the current time we are seen as being at the back of the queue, mainly because we no longer have the skills to build nuclear power stations, with countries such as the US and China all moving forward.

E.on bid for Scottish Power
Scottish power is preparing to fight an £11 billion approach from the German Utility giant Eon. Scottish Power is understood to be fighting the offer on the grounds that not all arms of it's business have been correctly valued, including PPM Energy. Scottish Power has put forward a restructuring plan that will cut 450 jobs and save them in the region of £60 million a year, this is thought by many in the city to be the beginnings of defence strategy designed to force Eon's bid to £6 a share. If the buyout went ahead, it would give the German group a 34 per cent market share, well above the 25 per cent threshold that is normally acceptable, this would mean Eon having to dispose of customers in order to comply.