Archive for the ‘Energy’ Category

PointofViewIs competition always a pre-requisite for efficient and economic delivery, or is it sometimes just a blind dogma?

In the UK we have a mixed economy with both public and private services. Currently, most if not all retail outlets are in private hands as are most industrial and financial services. Alongside these we have a range of public services funded from taxation which are provided to us, arguably designed to enable us to live a decent and productive life, such as the National Health Service, education, highways, waste collection and disposal, plus personal care services.

Since the 1980s this convenient distinction between public and private has become blurred by a process of privatising public services. Today, for example we have the utility services of energy (gas and electricity) and water provided by private companies. In recognition that such services still have a significant economic and social impact, government has created public regulators to oversee the operation of these utility companies. These are essentially there to protect the ‘public interest’.

There has been a growing pressure since these privatisations to diminish the power of the regulators in favour of introducing more competition within the utility markets. The argument has been made that where competition can take root then the inherent trading practices will progressively make those services more efficient and the retail prices would fall as a result. Thus the regulators would not be needed.

Clearly where competition can be seen to flourish such as in food, clothes and cars, the consumer is faced with a huge range of options to consider. They stretch from cheap budget goods and services to luxury brands that spare little in the craftsmanship and quality of the materials used. Retailers also compete on price for the same branded goods in search for a customer. Therefore the consumer is able to exercise a rational choice, not just of the supplier but also on price and more importantly, for example, of the model of car, the colour and cut of a shirt, or the type of cereals to eat for breakfast.

margaret thatcher, privatisation, britain, electricity, edf, big six, shareholder, france, state-owned

Margaret Thatcher spoke of privatisation giving ‘power back to the people’ and freeing British enterprise to lead the world. Now in 2013, small shareholders have no influence, and EDF, one of the ‘big six’ UK energy suppliers, and owner of a large portfolio of our power stations, is a French state-owned company.

When the utility services were privatised, the previous publicly owned national utilities were broken up into a number of independent companies. In both the gas and electricity utilities, retail companies were set up to compete with each other for customers. The government deliberately engineered this arrangement in the belief that competition would work its magic and customers would benefit from cheaper energy and could choose which supplier they wanted largely based on price. (Currently the UK market is dominated by six energy providers). Government has also encouraged the creation of ‘swapping’ websites that make it easier for customers to seek out an apparently better deal and to swap from their existing supplier to a new one.

Most consumers today see this artificially created energy market as dysfunctional and not operating in the public interest. Competition has not worked and most consumers have little faith in the swapping process to help them find a cheaper energy provider. Why is this?

gas, supplier, distribution network, britain, wholesale price, demand and supply

All UK gas suppliers use this same distribution network, and the wholesale price of gas is determined by global supply and demand. And the gas that comes out the pipe, is the same for all.

This is a classic case of the ’emperor has no clothes’, especially if you are an industry insider where your thoughts are ruled by what I would describe as some kind of internal fantasy. Take energy as an example. From the consumer’s point of view the product is exactly the same no matter who the supplier is. As there is only one distribution infrastructure, every supplier has to use it to deliver the energy to your home or business, and most suppliers also use the same energy generators to source their product. Similarly from the provider’s viewpoint, in addition to being dependent on the same infrastructure they also face the same cost pressures. The price of wholesale fuel is fixed by international mechanisms which impact on all domestic generators equally.

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The UK’s capacity to produce electricity is in the news. The energy regulator, Ofgem, has warned that spare capacity in power production could fall to 2% by 2015, increasing the risk of blackouts. The closure of ageing power stations, as well as tough emissions targets and the UK’s increasing dependency on gas imports, are all contributing to this heightened risk of shortages. But behind the scenes the matching of electricity supply to demand – electricity cannot be stored on a large-scale – remains a considerable challenge every day.

Most of our power is generated by fossil fuel power stations, which take half an hour or so to crank up to full power; nuclear power stations take much longer. If a cold spell is forecast there’s enough time to respond, and the same goes for the predictable increase in demand in the mornings and in the late afternoon. But when a popular TV programme finishes , many people go and put the kettle on, causing a sudden peak in demand for electricity that conventional power stations can’t meet instantly. How can electricity be produced immediately?

Pumped storage reservoirs are used to meet sudden peaks in electricity demand

Pumped Storage Reservoirs
To meet sudden peaks in demand for electricity, water is released from an upper reservoir to a low level reservoir on the way driving turbines and the generators that produce electricity. At night, the water is pumped back up to the top reservoir using cheaper electricity.

The solution is provided by pumped storage reservoirs. A pumped storage plant has two separate reservoirs, an upper and a lower one. When electricity is in low demand, usually at night, water is pumped into the upper reservoir. When there is a sudden demand for power, giant taps known as the headgates are opened allowing water from the upper reservoir to flow down through pipes to turbines which produce electricity, and back into the lower reservoir ready to be pumped back up later. To maximise the fall of the water, the four pumped storage plants are all in mountainous areas. The Cruachan and Foyers schemes are in Scotland, and Ffestiniog and Dinorwig are in North Wales. (more…)

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