Comment: PowerGen boss wants a rethink on competition
Ed Wallis, chairman of Powergen, on why he should be allowed to own a rec
Thursday 02 October 1997
The Energy Minister, John Battle, is right it to stand firm in insisting that the industry delivers deregulation to the deadline of 1 April next year. It is an enormous technical and logistical challenge. But the industry has been planning for the change since 1990 and invested at least pounds 500m in billing and metering technology. It must go ahead as close to the original timetable as possible.
Liberalisation should make an industry with an annual turnover of pounds 15bn directly accountable to the people it exists to serve. But if this objective is to be achieved I believe the Government has to do more than ensure that the power deadline is met and that the systems work. It also needs to set a new direction to energy policy in the UK. In doing so, it could clear the way for a market-based solution - a sustainable, competitive framework in which households will have real and lasting choice.
The energy revolution of the early 1990s has brought huge change and enormous benefits. Upstream, in the generation of electricity, the monolithic, state-owned Central Electricity Generating Board has given way to 20 companies competing to meet the nation's electricity demand. Innovative management and high, sustained investment means Britain sets the global benchmark for efficiency, safety and environmental performance. Improved efficiency throughout the industry means energy bills are up to 20 per cent lower, saving the average household around pounds 60 per year. Customer complaints have halved.
Downstream, in the supply of energy direct to our homes, Britain is leading Europe in completing the single market. Now, customer choice should bring lower bills, better services and a greater focus on energy efficiency and environmental performance. But not even the system's architect, the industry regulator, Professor Stephen Littlechild, believes that most electricity customers will have a worthwhile choice. He predicts that, over the next two years, fewer than 1 in 20 customers will have sufficient incentive to switch supplier. This reinforces government fears that a small minority of wealthier homes will benefit, rather than lower income households.
Why? Because all the regional monopolies benefit from the status quo. None of them gains from competing head to head. And the barriers to market entry are too great to allow companies like PowerGen to cut out the middle man and market the product they make direct to customers.
What we have is an industry structure that resembles the ITV network of regional franchises. What is needed - if competition is to take root - is one more akin to petrol, banking or even the supermarkets. Five or six strong players and a number of smaller competitors would have a powerful incentive to compete to win business from each other. The risk of competition being stalled or moribund as 12 incumbent monopolies try to defend their own home territory would end.
It is multi-energy companies - active in all areas of the supply chain - that will bring change and customer choice. The bigger the customer base the more companies are able to reduce the costs of serving customers. The wider the contract portfolio, the more able a company is to hedge the risks when capital costs are high and demand is volatile. The more competitive the market, the more companies will invest in a strong brand and customer service.
The Government doesn't have to impose this model on the industry. But it does have to decide to let business strategies evolve within a stable, consistent and transparent regulatory framework. Scottish Power and The Energy Group generate, distribute and supply electricity. Centrica, gas supplier to 16 million households, produces gas from Morecambe Bay. Multi- utility companies, spanning telecoms, water, gas and electricity, are emerging.
Allowing other generators to expand into electricity distribution and supply would break the current impasse. As a result it should entice new entrants - independent suppliers, retailers and others who would force the bigger players to remain agile and responsive to customers.
And it will give domestic competition the kick start that it so desperately needs. Restructuring should also bring further customer dividends through increased efficiencies benefiting all households, not just a favoured few. Public policymakers would be able to ensure that energy efficiency does improve and low income households are also able to benefit. It would enhance the competitiveness of UK companies in global markets, where operating throughout the supply chain in a range of energy and other utility services is increasingly important.
Others may have a different vision of how the market should develop, but no one should doubt the need for a step change in government and regulatory policy. The previous government found that the industry structure it created at privatisation was not sustainable. But it was unwilling to accept the new market-led evolution of the industry. A continuation of this erratic policy will not deliver effective competition or genuine customer choice.
The nasty shock for 20 million households is that they would then bear the costs and risks of creating the administrative infrastructure of a competitive energy market without any real hope of benefiting from it. All of us - industry, regulator and government - would then be held to account for denying our fellow citizens the competitive choices they clearly expect.
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