Electricity and the Primary Fuels: Technology, Market Structure and Prices

By Posner, M. V. | National Institute Economic Review, August 1993 | Go to article overview

Electricity and the Primary Fuels: Technology, Market Structure and Prices


Posner, M. V., National Institute Economic Review


only short periods. The RECs have therefore understandably been eager to balance their risks by concluding long-term purchase contracts (15 years) from the IPPs, whose market power to squeeze the RECs is negated by the fact that most IPPs are partially owned by their REC customers. The attractiveness of these contracts has been even greater because the primary fuel input and the technology involved are new--CCGTs; and because all the relevant peer group--all 12 RECs--are doing the same thing. If the decision turns out to be wise, bravo. If it turns out to be mistaken, 'well we all made the same mistake'. The Regulator has the role of helping to ensure that the ultimate consumer does not pay for any mistaken investment, but in the A sharp change of pace in energy policy

The last twelve months have seen much disputatious change in investment for electricity supply, in likely developments in the supply and distribution of natural gas, and above all in the coal industry. The Government's announced Review of policy for nuclear energy will soon begin. The outlook for policy on the North Sea oil and gas business, despite the 1993 Budget changes for profits taxation on oil exploration and extraction, is by contrast relatively calm--the disputes of the 1970s and 1980s on the use of North Sea benefits for the fiscal balance and the balance of payments has subsided, lost in larger macroeconomic problems.

This article concentrates on the changes in the ownership, methods of control, and technological developments in electricity supply; the economic and financial decisions that these changes have caused; and their effect on the coal industry.

The change of ownership and control of the electricity supply industry, although very new (beginning only in 1990), has been startlingly abrupt in form; and, as the last twelve months have shown, also in content. The revolution (it is not too strong a word) is not just for electricity--because the mix of primary fuels into electricity generation is now the crucible in which the relative shares of coal, nuclear energy, and gas will be determined. The change in the ownership, control and motivation of the electricity enterprises has coincided with other events to push the UK into the world lead in utilising a brand new gas-based technology for electricity generation, to surround nuclear development with a strongly negative aura, and to topple the UK deep mined coal industry over the final small cliff on its long decline towards a small subsidiary part in the fuel sector.

If these decisions on resource allocation are largely correct, the speed and vigour of their appearance is a triumph for the privatisation process. If they are largely wrong, or wrongly timed, they are of sufficient importance, and sufficiently 'basic' to the British economy, to constitute a grave error. The result is that energy policy, for the first time for fifteen years, is once again of some general economic importance: and the rules of operation of the electricity supply industry are at centre stage in the energy policy drama.

Table 1a and 1b and their accompanying charts give a quick snapshot of the energy sector in 1992. It measures fuels in tons of 'coal equivalent'--converted by standardised rules of thumb from their own original units of measurement, the test being the amount of crude heat that can be supplied. This is a poorly specified form of equivalence--nobody uses coal to run motor vehicles, and electricity (although it can produce heat for cooking or space heating) is mainly prized for its power to produce light or rotational force. Nevertheless, in electricity generation all primary fuels do compete, and their thermal equivalence is a key factor (although not the only one). A measure of equivalence of more immediate attraction to economists is money (prices or costs). Table 1a shows that although electricity provides only 17 per cent of total fuel sales in coal equivalent terms, it TABULAR DATA OMITTED TABULAR DATA OMITTED constitutes 51 per cent of money expenditure on fuel; per unit of thermal output, electricity is very expensive, but customers are happy to pay that high price to power their machinery, to light their offices, or even to boil a kettle. …

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Electricity and the Primary Fuels: Technology, Market Structure and Prices
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