INDUSTRY BRIEF REGULATION OF THE UK ELECTRICITY INDUSTRY 2002 edition Gillian Simmonds REGULATION OF THE UK ELECTRICITY INDUSTRY 2002 edition CRI Industry Brief Gillian Simmonds Desktop published by Jan Marchant © The University of Bath All rights reserved ISBN PREFACE The CRI is pleased to publish the 2002 edition of its industry brief on the Regulation of the UK Electricity Industry, having updated it for developments since the 1998 edition. It has been prepared by Gillian Simmonds, a Research Officer at the CRI, and supersedes the first edition which was prepared by Carole Hicks, then a Research Officer at the CRI. The brief is part of a set of CRI industry briefs for the utilities and network industries, covering water, energy, transport and communications. The structure and regulation of the electricity industry has changed considerably since 1998, including developments such as the new electricity trading arrangements (NETA), competition in electricity supply and the Utilities Act 2000, which created, amongst other things, separate, independent arrangements for consumer representation (energywatch) and the Gas and Electricity Markets Authority (the ‘Authority’), which took over the powers and duties of the Director General. The new 2002 edition is, therefore, substantially a new document, rather than a ‘revision’. The CRI would welcome comments on the Brief, which can be taken into account as CRI Industry Briefs have to be updated from time to time in line with developments in the Industry, and will be published as a ‘revised’ or subsequent ‘edition’. Comments should be addressed to: Peter Vass Director – CRI School of Management University of Bath Bath, BA2 7AY The CRI publishes work on regulation by a wide variety of authors, covering a range of regulatory topics and disciplines, in its International, Occasional and Technical Paper series. The purpose is to promote debate and better understanding about the regulatory framework and the processes of decision making and accountability. Enquiries or manuscripts to be considered for publication should be addressed as above. The views of authors are their own, and do not necessarily represent those of the CRI. Peter Vass Director, CRI May 2002 iii iv CONTENTS Page Preface iii 1 Historical overview 1 England, Wales and Scotland 1 Northern Ireland 10 2 The electricity industry 15 Generation 15 Transmission 18 Distribution 19 Supply 19 3 Industry and market structure 21 England and Wales 21 Scotland 31 Northern Ireland 37 4 Regulation 43 - Institutional governance of the electricity industry 44 England, Wales and Scotland 44 Northern Ireland 52 - Regulatory instruments: licences 54 England, Wales and Scotland 54 Northern Ireland 65 5 Economic regulation 69 Price controls 69 England and Wales 69 Scotland 76 Northern Ireland 82 Review of competition 86 6 Standards of performance 99 England, Wales and Scotland 99 Northern Ireland 104 7 Environmental regulation 107 Energy efficiency policy 109 Renewables policy 115 Distributed or embedded generation 121 8 Social regulation 123 Codes of practice 125 Industry initiatives 128 Other regulatory initiatives 129 Appendix 1: Generation – changes in ownership and new plant and entrants 131 Appendix 2: Generators operating in the UK 132 Appendix 3: Principle electricity supplier groups’ shares of domestic 133 electricity supply in Great Britain (by customer supplied) Appendix 4: Current distribution network operator groups 134 Appendix 5: Statutory duties of the secretary of state and the Authority under 135 the Electricity Act v vi vii 1 HISTORICAL OVERVIEW England, Wales and Scotland Pre-privatisation1 Following the Second World War, the UK had some 560 electricity suppliers, of which approximately one-third were privately owned. Under an Act of 1943, electricity supply in the north of Scotland was placed under the North of Scotland Hydro-Electric Board (the Hydro-Electric Board), a public corporation established to develop the water power resources of the Highlands. Under the Electricity Act of 1947, the electricity industry in England, Wales and south of Scotland was reorganised and nationalised. The act established the British Electricity Authority (BEA) as a public corporation responsible for the generation and transmission of electricity, as well as for the policy and finances of the supply industry. The act also created 14 area boards – 12 in England and Wales and 2 in the south of Scotland – each constituted as a separate public corporation responsible for the distribution and retail of electricity in its own region. The Electricity Reorganisation (Scotland) Act 1954 established the independent south of Scotland Electricity Board (SSEB) from the two Scottish area boards and the BEA’s two Scottish generating divisions. Like the Hydro-Electric Board, the SSEB was responsible for all three functions of generation, transmission and distribution. At this time, the BEA was renamed the Central Electricity Authority (CEA). The Electricity Act of 1957 further reorganised the electricity industry in England and Wales. In order to introduce greater decentralisation, the CEA was replaced by two new statutory bodies – the Central Electricity Generating Board (CEGB) and the Electricity Council. The CEGB owned and operated the transmission system and the generating stations in England and Wales. The CEGB was responsible for the bulk supply of electricity to the 12 area boards in England and Wales, and its duties included planning the provision of new generation and transmission capacity. Under the act, the area boards were accorded greater autonomy, particularly for financial matters, and continued to have responsibility for the distribution and retail of electricity in their respective areas. The Electricity Council exercised a co-ordinating role on matters of industry-wide concern. The council, in addition to three full time members, included the chairs of the 12 area boards and three representatives from the CEGB. The council also had certain specific duties, including offering advice to the government on behalf of the industry as a whole, and promoting and assisting the maintenance and development, by the electricity boards in England and Wales, of an efficient, co-ordinated and economical system of electricity supply. 1 This section is drawn primarily from Hicks C (1998), Regulation of the UK Electricity Industry, Centre for the study of Regulated Industries; and Organisation of the Electricity Supply Industry in England and Wales – A thumb-nail sketch, originally issued by the Electricity Council as leaflet RP1(a) in February 1984. Gillian Simmonds, Research Officer, Centre for the study of Regulated Industries (CRI), University of Bath School of Management 1 UK ELECTRICITY REGULATION The pre-privatisation structure of the electricity industry in Great Britain was, therefore, characterised by extensive vertical integration of generation, transmission, distribution and supply. The structure of the nationalised industry in England and Wales was dominated by one large generation and transmission company, the CEGB, which sold electricity in bulk to 12 area distribution boards, each of which served a closed supply area or franchise. In Scotland, there were two vertically integrated boards that exercised regional monopolies, but co-operated closely in the use of their generating plant to ensure that demand was met at least cost (see Figure 1).2 Figure 1: Structure of the nationalised electricity supply industry England and Wales Scotland Generation and bulk CEGB SSEB H-EB transmission Bulk Supply Tariff set on LRMC basis Regional distribution Area Electricity Boards (12) SSEB H-EB (retail tariffs set on LRMC basis) Final markets Residential Commercial Industrial Residential, Commercial & Industrial Privatisation The Electricity Act 1989 (which received Royal Assent on 27 July) laid the legislative foundations for the restructuring and privatisation of the electricity industry in Great Britain. The act made provision for a change in ownership from the state to private investors, the introduction of competitive markets, and a system of independent regulation. In contrast to the privatisations of the gas and telecommunications sectors, the electricity industry was restructured prior to privatisation. This was in response to widespread criticism of previous sell-offs, where it appeared that a public monopoly was basically transformed into a private monopoly.3 On 31 March 1990, a new industry structure was introduced into England and Wales (see Figure 2). This restructuring:4 2 Electricity Association (1999), The UK Electricity System. 3 McGowan F (1993), Electricity – The Experience of Offer, in [Eds] Gilland T and Vass P (1993) Regulatory Review 1993, Centre for the study of Regulated Industries. 4 Hicks C (1998), Regulation of the UK Electricity Industry, CRI. 2 GILLIAN SIMMONDS • Split the CEGB into 3 generating companies and a transmission company: National Power, Powergen, Nuclear Electric and the National Grid Company (NGC). Fossil-fuelled power stations were transferred to National Power and Powergen, the nuclear power stations were transferred to Nuclear Electric, and the transmission system and the Dinorwig and Ffestiniog pumped storage power stations in Wales were transferred to the NGC. The NGC also took control of the interconnectors with Scotland and France. • Replaced the area boards with twelve regional electricity companies (RECs). The local distribution systems were transferred to the RECs and each REC was obliged to supply on