Managing Change in the UK Power Industry

By Stockdale, William | Risk Management, October 1993 | Go to article overview

Managing Change in the UK Power Industry


Stockdale, William, Risk Management


Prior to the Thatcher administration, power generation, distribution and transmission in the United Kingdom were in state hands. Prices were set by the state and were typically driven by political considerations, with little regard for return on capital. State-run power companies such as the Central Electricity Generating Board (CEGB) and the South of Scotland Electricity Board (SSEB) lost quite a bit of money during that period.

Once the move to privatization was set in motion, the formation of the various new companies took some time. CEGB split into three companies: National Power, PowerGen and Nuclear Electric, although the latter still remains in state ownership. In addition, the previous 12 Distribution Councils were privatized into 12 Regional Electricity Companies (RECs). These distribution companies jointly own The National Grid Company, which owns and operates the National Transmission System. The SSEB became ScottishPower, and the Scottish Hydro Board became known simply as ScottishHydro.

The nuclear facilities in Scotland were grouped together to form Scottish Nuclear. However, the private sector wasn't ready to take on the political and other ramifications involved in attempting to privatize the nuclear power industry. As a result, nuclear power remains state-run in the United Kingdom.

This shift from a state-owned system to a privatized one has brought numerous changes to the power industry in the United Kingdom. The new privatized companies are striving for growth while emphasizing the upgrade of existing plants. For risk managers, the shift toward privatization has created a variety of challenging issues.

The privatization of the U.K. power industry led to several developments. First, the advent of privatization gave birth to the independent power industry in the United Kingdom, with a number of independent power producers (IPPs) setting up plants all over the region. Most of these plants, particularly the largest, are combined cycle gas turbine plants using natural gas. To date, some 15,000 to 16,000 megawatts of power originating from the IPPs are under construction or planned.

Most of the IPPs are set up using bank financing, which fuels the need for insurance. The IPPs are holding companies that contract out all services, spreading risk to banks and insurance companies. Each insurance policy differs depending on the structure of the IPP. Most IPPs are set up with just 10 percent or 15 percent equity.

The RECs have contracts with these plants, which stipulate that they will buy electricity over a 15- or 20-year period under a Contract For Differences. Under such a contract, as long as the plant is available, the purchaser will pay a capacity charge that covers all fixed costs associated with buying the power. The only variable cost is fuel, which the purchaser doesn't pay for if the plant is not running. By the end of the century, there may be as much as - or more than - 16,000 megawatts coming from these gas-fired combined cycle plants in the United Kingdom.

Privatization has also motivated power generators to increase profits by operating much more efficiently. For example, National Power with its 35 power stations in England and Wales has reduced its work force from 17,000 in 1991 to about 8,000 today. In addition, output of electricity per employee is up by 13 percent. These efficiencies are being matched by PowerGen, the second largest power generator in the United Kingdom. At PowerGen, the staff has been reduced from some 8,300 to about 5,100, accompanied by an employee output increase of approximately 12 percent.

The type of fuel burned by the power generators had also been affected by privatization. Both National Power and PowerGen will be importing more coal, which is currently cheaper than British-mined coal. During the past few months, many negotiations have taken place with the government, RECs and British Coal on exactly how much and at what price coal will be purchased. …

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