Priviatisation and Regulation

Anne Middleton Matric No 200303953 Privatisation and Regulation Seminar Tutor Alan Hutton Case Study Energy Sector Date of Submission 9.11.06 1 Contents 1. Introduction …………………………………………….3 1.1 Current situation…………………………………………... .3-4 1.2 Nationalisation………………………………………………... 4 1.3 Privatisation………………………………………………….. .5 2. Issues ………………………………………………..5- 6 2.1 Competition Consolidation and Pricing ……………………. 6 2.2 Natural Resources ………………………………………....7- 8 2.3 Environment ……………………………………………………8 3. Government Policies ………………………………...8-9 3.1 UK Policies ……………………………………………………9 3.2 Security ………………………………………………… 9-10 3.3 Scottish Executive …………………………………………….10 3.4 Nuclear Power …………………………………………….10-11 4. Alternative Energy Solutions …………………….11-12 5. Conclusion ……………………………………………..13 6. Bibliography ……………………………………………14 2 1. Introduction This case study will firstly provide an overview of the energy sector as it is today. Secondly the case study will then examine the different stages of the industries’ short history, from nationalisation to privatisation and will further explain the rational behind each stage of development. Current key issues will also be considered in conjunction with the UK Governments’ and the Scottish Executives’ energy policies. Thereafter a conclusion will be given along with some brief recommendations. 1.1 Current Situation “Energy bills up 38% as suppliers rake in £6bn” (The Times 2006). While these results are good for shareholders, reports published this month by the consumer groups Energy Watch & uSwitch suggest that consumers are the losers and 48% are dissatisfied with the service they receive from their energy companies. One example given is that hundreds of thousands of people are still getting estimated or inaccurate energy bills resulting in more than 50,000 complaints in the past year. This meant that the industry paid out £2.5m in compensation to customers last year (BBC Online, Nov 2006). Energy Watch claim that of the 200 million bills sent out in 2005, more than a third was estimates. The also argue that with sky-rocketing prices, estimated bills that are far too high mean consumers are over-paying and the electric and gas companies are building up quite large cash sums that really belong to consumers. (BBC Online, Nov 2006) Electric and gas bills for the domestic consumer rose this between 30% and 40% respectively, forcing many more people into fuel poverty. The coalition of Barnardo's, Children in Scotland, Child Poverty Action Group, Capability Scotland and Save the Children (2006) blame the energy companies’ high fuel prices and putting profits before "corporate social responsibility”. Soaring wholesale gas and electricity costs have pushed up household bills, however 3 electricity and gas companies operating profits are up by around 11% and 15% (Age Concern 2006). Scottish Power is just one example of an energy supplier that has announced record half yearly profits, £480, a rise of 77%. The current situation of high prices, uncertainty over future supply shortages, dwindling supplies, disconnection rates rising and poor customer service has meant the UK government now has an important role to ensure there is consistency and fairness as well as competition. Given the current situation, Gordon Brown is attempting to force power companies into effective schemes to help low-income users (The Glasgow Herald 2006) 1.2 Nationalisation The Nationalisation of the electricity and gas industries occurred around 1947 and 1948 and was part of a larger movement towards state ownership of the main industries under the Labour government Post World War Two. The reasons for nationalisation are multidimensional however Griffiths & Wall (2004) suggest that within the socialist government’s public sector portfolio, economic planning could be controlled and full employment would be achieved. Industries that were in the public sector meant investment could be directed to where it was needed, economies of scale would be achieved, political, social, environmental and economic goals reached. The 1947 Electricity Act nationalised approximately a third of the suppliers which had been privately owned, allowing electricity supplies to be centralised. In England and Wales the Central Electricity Authority controlled supplies and Scotland was divided into two sections: North of Scotland Hydro-electricity board and South of Scotland Electricity Board. The Gas Act 1948 followed and twelve area Gas Board Corporations were formed, more 1000 privately owned and municipal gas companies were nationalised. Scotland was one area and the other eleven were in England In 1962 the first surveys of the North Sea took place and by 1967 North Sea gas was being brought ashore at Easington terminal (Centrica 2006) 4 1.3 Privatisation A burgeoning public sector that was stifling private enterprise and economic growth, combined with Government failure and inefficiency, were some of the reasons behind the privatisation programme started in the early 80’s. Margaret Thatcher’s belief in neo-liberal ideology, monetarist economic policies, and the resolute conviction that the free market would be the answer to all the countries problems. It can be therefore be surmised that the over arching aim behind her governments’ policies was that through privatisation, deregulation and liberalisation the size of the public sector would be reduced, taxes and government spending would come down. Competition efficiency, effectiveness, economic performance, accountability and consumer choice were the key words. The Treasury saw privatisation of the energy companies as a way to raise money to meet borrowing targets and the government could carry out their election promises and reduce income tax. British gas was sold off for £5.4 billion and Electricity around £3 billion. Of interest is one clause in the 1982 Gas Enterprise Act, the clause states that British Gas were now obliged to carry gas for third parties. The equivalent for electricity was the 1989 Electricity Act which was supposed to open up the industry. However many reserved judgement about the introduction of market forces into the utilities and selling off the UK’s assets, including the Energy Committee (1988) who stated that, the evidence overwhelmingly confirms that, the competitive market which was promised has not yet materialised, consumers seemed no better off. 2. Issues      Rising prices Abuse of monopoly power in the energy industries No real competition Unappeasable demand for fossil fuels Environmental and social issues 5  Present demand and consumption can no longer be met from fields in the North Sea.       The UK is already dependant on foreign imports of natural gas Currently the UK has no facilities to store natural gas Security Issues Coal and fired gas power stations are now expensive, environmentally unfriendly and uneconomical Environmental issues Alternative solutions to the energy crisis 2.1 Competition Consolidation and Pricing Electric and Gas Energy firms stated in July that "unprecedented high wholesale energy costs" had made necessary the September price rise of 12.4% for gas and 9.4% for electricity. However, these companies are posting record profits and twenty years on from the Energy Committees report there is still little evidence of a competitive market as promised. The utility companies are still monopolies in most of the areas they compete in i.e.:- resources, generation, transmission and distribution. Barriers to entry are still in place, with the incumbent organisation still having its vertical integrated network that it started with, intact. The only area in which the customer has any choice is in supply, where although there are oligopolies competition is still limited with the number of firms falling therefore making future competition even less likely. This situation will intensify as the industry consolidates, with Scottish Power being the latest to agree to a £11.5bn take over bid by Spanish Bilbao-based energy company Iberdrola. The so called liberalised energy market is one sided as Dave Watson (2006) from Unison points out, foreign companies can acquire our key Scottish enterprises but their home markets are protected. One other point of interest is that Iberdrola is one of the worlds leading providers of wind energy, and it is in this area of expertise in Canada that Scottish power maintains that’ its profits come from. 6 The recent power cuts across Europe have seen calls for a European approach rather than 27 different approaches and showed the need according to Energy Commissioner, Andris Piebalgs, for a Europe-wide common policy on electricity distribution. E.ON the German power company maintained that its grid had overloaded after it temporarily switched off an electricity line in northern Germany. (BBC Online Nov 2006). The response from the UK government however is optimistic as they think the selling point for a common energy policy will be that it will cut costs for all of us by encouraging competition. The Energy Commission paper proudly notes that, from July of next year, every consumer will have the right to purchase gas and electricity from any supplier in the EU. However previous experience seems to point to the fact that this will not happen, as more organisations merge the competition and choice will get less. Regulatory bodies like Energy Watch and OFGEM are there to help empower the consumer but in the face of the monopolistic power and the current global energy crisis, they seem to be unable to help the disadvantaged and the energy poor. 2.2 Natural resources Leading energy experts believe that oil and gas fields in the North Sea are reaching the end of their lifespan (The Scottish Executive (2006). Production according to the Economist (2006) in the North Sea could be all but finished in 20 years. The UK is already net importer of natural gas and currently 2% of the natural gas comes from Russia but analysts predict that this will rise rapidly to 25% in the next decade as the UK runs out (The Independent 2006). This raises the question of security of supply for customers in the UK Soaring oil and gas prices however can also be partly attributed to the following:    The hurricanes in the Gulf of Mexico which destroyed or put many of the platforms off line and damaged refineries in that region. The decline in output since 1999 of British North Sea oil. China has gone from importing no oil 15 years ago, to becoming the world’s number two oil importer. 7   Unrest in the Middle East and the threat of a war engulfing more oil producing nations. BP’s major pipeline in Canada going off line 2.3 Environment Greenpeace (2006) argue that by continuing to burn fossil fuels like oil, coal and gas to produce energy, climate change, extreme weather patterns and environment problems, damage to eco system is already being experienced throughout the world. Meanwhile the Earth's population continues to rise, with the majority of its six billion people hankering after a richer lifestyle - which means a greater consumption of energy (The BBC Online 2006). China and India’s growing carbon dependency and booming economy has negative externalities or what Gordon Brown referred to as “the world’s biggest market failure” has and consequences for the rest of the of the world. Stern (2006) states in his recent report that the power sector will have to decarbonise by 75% by 2050 to reverse the current trend. China is second next to America in the pollution league tables and like America, unwilling to commit to the Kyoto agreement. However, evidence suggests that the UK while appearing to be at the cutting edge of policies aimed at tackling climate are in fact ineffectual (Guardian 2006). Surveys completed by leading UK energy experts state that although Britain agreed to 12.5%, this is a target they are unlikely to meet and suggest that a new generation of nuclear plant will ensure the country reaches its targets, however these findings however are in complete contrast to surveys that Greenpeace have undertaken within the nuclear sector. It should be noted however that these reports could be bias as they compiled and published by companies that have interests in the nuclear industry. 3. Government Policies 3.1 UK Policies The UK’s increasing dependence on gas imports and foreign owned utility companies has moved geopolitical threats to energy supplies sharply up the political agenda since 2003, when the government’s energy review largely 8 ignored the issue. The review of energy policy now under way has put security of supply centre stage. Tensions in other oil producing countries mean there is a lack of stability in the UK’s oil and gas suppliers. Despite all this the focus seems however to be on funding and supporting the development of technologies that improve efficiency rather than development of new sources of power. Lack of investment in alternate sources of energy and storage facilities from the revenue generated from the oil and natural gas when supplies were at their peak was perhaps a major oversight. Scotland and the rest of the UK have made no provision and therefore have no alternative to fossil fuels when they run out. The key policies on energy therefore can be summarised as being too little too late and what there is seems to be a bit problematic and changes on a week to week basis. 3.2 Security This country is becoming gradually more reliant on the rest of the EU and Russia to supply the natural gas. Problems have already arisen because many of the member countries in order to protect their own reserves and supplies are failing to comply with EU rules and are operating as monopolies and artificially propping up gas and energy prices (The Herald 2006). The UK however according to the Financial Times (2006) has made a virtue of this lack of political interference, which has allowed nearly all our utilities to be taken over by European Union companies with no political discussion and barely a murmur of public dissent. Britain’s open energy market now means that electricity is supplied by German and French companies. There is a choice of four gas suppliers, three of whom are foreign owned. The Financial Times (2006) reports that Centrica, Britain’s largest energy supplier could be the target for a bid by Gazprom, the Russian gas giant. This situation is now ringing alarm bells in Whitehall (FT Online 2006). Russia could use ownership of a UK gas supplier to try to exert political influence, energy could be a powerful weapon and countries would be held to ransom Analysts are uncertain if the current dispute Russia is involved in will result in further price hikes as last year’s dispute with the Ukraine resulted in the 9 sabotage of pipelines which doubled gas price in the EU. The conclusion by the Economist (2006) was that this dispute was Russia attempting to impose its dominance and acquire control over all gas and oil pipe lines and therefore the lucrative markets in the West. 3.3 Scottish Executive Scottish Executive does not appear to have any different policies from Westminster, nor does it seem to have any long term strategies, solutions, sustainable alternative polices or objectives. However Jack McConnell (2005) states that the Scottish Executive does have one clear policy and that is that until a safe way of disposing of the waste is found there would be no new nuclear power stations. It would appear however that there is more than one definition of safe (The Financial Times 2006). Furthermore one other important point is that energy is a reserved function; but land and issues that relate to it are devolved. This fact could lead to some very interesting debates in the future. Specific strategies are difficult to identify however according to press releases, a major development took place earlier this year and the Scottish Labour Party (2006) took the decision to support a new generation of nuclear power stations (The Scotsman 2006). This major development could suggest that the UK will follow Finland’s lead and commit to nuclear power. The Committee on Radio Active Waste Management is expected to report on the issue of waste disposal later on this year therefore no decision will be taken by the Scottish Executive until the report is reviewed. This therefore is perhaps the key test to the future of new reactors in Scotland and the rest of the UK 3.1 Nuclear Power The UK Government in 2003 set out its energy strategy for the coming years which was to be centred on renewables and energy efficiency, and ruled out new nuclear power stations for now. Tony Blair (2003) recommended that the future can be transformed by the use of clean energy forms; however it would appear that the UK government now seems to be moving towards endorsing new nuclear power stations. The developments in the Middle East, the current 10 world fuel crisis and soaring oil prices would seem to guarantee that nuclear power is back on the agenda again. In contrast it seems that the experts, engineers and academics (cited in the Sunday Herald 2006) disagree and say that nuclear power is “a limited, inflexible, expensive and potentially dangerous source which creates unique problems”. Another significant factor and a major limitation to the next generation of nuclear reactors is a skill shortage at all levels. The Institute of Physics (2005) suggest that it will take at least 15 years to train the next generation of workers. However Malcolm Wicks the Energy Minister (Cited in The Scotsman, 2006) suggests that the government has plans to create a laboratory to train the next generation of workers signalling the restart of the nuclear programme in the UK. In contrast the lack of public support for nuclear power was demonstrated in consumer a survey which was undertaken by Greenpeace (2006). The results seem to show that over 70% were against a new generation of nuclear power stations but supported renewables (Greenpeace 2006). 4. Alternative Energy Solutions According to the regulator Ofgem, investment in the pipelines between the Norwegian gas field, one also from the Netherlands, increased capacity in the pipeline from Belgium and increasing the storage facilities will transform the energy scene in the UK and prices will fall (The Financial Mail 2006). This however can only be a short term solution, other ways of producing energy that are both sustainable and long term need to be found. By investigating how other countries have approached the problem, and exploring the possibilities of adapting their solutions to this country’s problem, the Scottish Executive and the UK government could then develop long term policies and alternative strategies. There is however a subtle difference between gas and electricity, gas is not regarded essential, electricity is therefore the objective has to be to find an environmentally, cheap and reliable way of producing electricity for this countries future needs. Oil and gas R&D does not need money from the government, the multi nationals within 11 that industry ensure there is money for research; however money is needed from the government to help develop renewables which will replace fossil fuels. Many of these products are still being developed are in their infancy, so they could be made cheaper to install and run if capital investment was made available by the government. The future for this country seems to be in the development of renewable energy sources and our ability to generate electricity from wind, water, sun and the waves with the focus on developing new technologies for producing low carbon energy (Herald 2006). Evidence suggests that the UK is lagging behind however environmental groups have put forward recommendations as to how the UK and Scottish governments might tackle the problem and what policies are needed, some of which are as follows: -  Greenpeace (2006) propose the solution is the large scale adoption by governments, corporations and individuals of renewable energy and to dramatically increase our energy efficiency.  Greenpeace (2006) suggests that Europe could achieve a third of its present electricity demand from offshore wind alone by 2020 if the right decisions are taken by governments  Green Clean Energy schemes are being proposed, the partnership between Npower and Greenpeace Juice is generated from a number of renewable energy sources, primarily at North Holye Wind Farm. As a Juice customer, Npower matches every unit of normal electricity that is used and feeds the same amount, generated from renewable sources, into the electricity network. This scheme could be rolled out nation wide using electricity generated from wave power if there was political backing. Brian Wilson (2006) suggest that connect to the national grid could be made easier and discriminatory charges removed and adequate capital grants to help get “technologies into the water”.  Other solutions proposed in the Economist (2006) now include 'Clean Green Coal' initiatives already in production or being researched in 12 Scotland, 'supercritical' boilers for power stations, flue gas desulphurisation equipment, combining coal with biomass energy crops, underground coal gasification burning it underground and bringing only the gas to the surface and carbon capture and storage, pumping power station waste gases into depleted coal seams and worked-out North Sea oil wells. 6. Conclusion Evidence therefore suggests that on mainland Europe the drive to find alternative sustainable power sources seems to be gathering pace with most EU governments’ actively promoting and supporting renewables. The Centre for Alternative Technology (Cat), (2006) is the leading ECO centre in Europe and gives advice on renewables to the individual household as well as countries. The European Environment Agency (2006), (EEA), lists success stories including the use in Austria of solar thermal energy and biomassfuelled district heating; wind energy and biomass power in Denmark, photovoltaics, solar thermal and wind energy in Germnay, photovoltaics and wind energy in Spain and biomass district heating in Sweden. The UK it should be noted does not get mentioned. Until there is a more positive and determined effort on the national and regional governments part, renewables will never become a feasible alternative to fossil fuels. Behemoths within the electricity and gas industries and their assurances that their aim is to give the customer in the UK a better deal does little to allay the fears of UK customers. These global players on the acquisition trail are swallowing up our network industries while there has been very little response from any of the political parties. This is leaving the UK vulnerable and research into alternatives lags behind our European partners. The UK is spreading what little money it sets aside to explore alternative sources of power over too many projects with very little joined up long term thinking. Therefore perhaps it is far-sighted to suggest that these strategies along with a lack of any clear policies are perhaps paving the way for a new generation of nuclear power stations which was the intention all along. 13 Bibliography Age Concern, Fuel Poverty,The Glasgow Herald, pg 2, November 26th 2006. http://news.bbc.co.uk/1/hi/business/6138488.stm, accessed 11.11.06 http://news.bbc.co.uk/1/hi/sci/tech/4648710.stm, accessed 10.11.06 http://biomass.getfast.info/biomass/biomass_energy.asp?q='biomass,energy %20from%20biomass,biomass%20energy, accessed 10.11.06 Brown T, The Independent, pg. 59 [First Edition], London (UK): Mar 16, 2006. 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