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Electricity Industry - UK - November 2017

“Suppliers have sought to differentiate tariffs in a number of ways, including by offering discounts for online account management and rewards such as gift cards. Recently, there has been an increase in tariffs that track wholesale price changes, and tariffs that allow energy to be purchased in bundles.
Suppliers are also increasingly offering tariffs that include non-energy services, such as boiler maintenance and technology that helps people control their energy usage remotely via the internet. This trend is set to rise with more energy suppliers moving into the emerging ‘home services’ and ‘connected homes’ markets, as profit margins in the retail energy market become increasingly squeezed and with suppliers scrambling to differentiate their offerings to stay ahead.”
– Claudia Preedy - B2B Analyst

This Report looks at the following areas:

  • What are the key drivers for network investment in the electricity distribution sector?
  • How do legislative changes affect the industry?
  • What challenges does the transition to a low-carbon economy present to DNOs?
  • What are the expenditure plans of individual DNOs for the current price control period RIIO-ED1?
  • What are the current market trends and issues in the electricity supply sector?

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Table of contents

  1. Executive Summary

      • Electricity distribution market
        • Figure 1: UK gross capital expenditure by the electricity distribution network operators, 2012/13-2016/17
        • Figure 2: Total expenditure allowance for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
      • Electricity supply market
          • Figure 3: Breakdown of average domestic electricity household bill, 2016
        • Market factors
          • DNOs subject to price controls set by industry regulator Ofgem
            • Decarbonisation of UK economy increases loads placed on distribution network
              • CMA energy market investigation
                • Energy retail market facing further government intervention, including price cap on SVTs
                  • What we think
                  • Key Insights

                      • What challenges does the rapid rise in distributed generation pose for distribution network operators?
                        • What is the outlook for the emerging electricity storage market?
                          • Key decisions relating to energy storage contained in the report include:
                            • What opportunities are offered by the widespread adoption of smart meters?
                            • Introduction

                                • Definitions
                                  • Methodology
                                    • Abbreviations
                                    • Market Positioning

                                      • Great Britain
                                        • Northern Ireland
                                        • UK Economy

                                          • Overview
                                            • Figure 4: Forecast GDP development 2017-21
                                            • Figure 5: UK GDP quarterly development, 2004-17
                                          • Inflation
                                            • Interest rates
                                              • House prices
                                                • Figure 6: UK House price changes, 2006-17
                                              • Consumer spending
                                                • Manufacturing
                                                  • Figure 7: UK manufacturing, 2014-17
                                                • Business investment
                                                  • Figure 8: UK GFCF, chained volume measures, seasonally adjusted, 2004-17
                                                • Imports
                                                  • Exports
                                                  • Market Factors

                                                      • Distribution networks price controls
                                                        • UK Energy Policy
                                                          • The government remains committed to tackling climate change despite Brexit vote
                                                            • New government policies urgently needed to achieve long-term emission reduction goals
                                                              • Government publishes long-awaited Clean Growth Plan in October 2017
                                                                • Levy Control Framework
                                                                  • Renewable Energy Obligation (RO)
                                                                    • Feed-in-Tariffs (FITs)
                                                                      • Government commits to fresh FIT review before end of 2017
                                                                        • The Renewable Heat Incentive
                                                                          • Contracts for Difference (CfDs)
                                                                            • First CfD auction concludes in February 2015
                                                                              • Second CfD auction winning bids dominated by offshore wind, which has seen a dramatic fall in costs
                                                                                • Next CFD auction scheduled for Spring 2019
                                                                                  • Energy Company Obligation (ECO)
                                                                                    • Electricity retail market reforms to promote increased competition
                                                                                      • CMA energy market investigation
                                                                                      • Distribution Industry Structure

                                                                                        • Key points
                                                                                          • Industry overview
                                                                                              • Figure 9: Ownership of the distribution network operators in the UK, as of October 2017
                                                                                            • Regional Electricity Demand
                                                                                              • Figure 10: Electricity sales and customers by region, Great Britain, 2015
                                                                                              • Figure 11: Regional proportional importance of electricity consumed in Great Britain, 2015
                                                                                            • Electricity consumption by end-use sector
                                                                                              • Figure 12: Analysis of electricity usage, by type of industry, UK, 2011-16
                                                                                              • Figure 13: Analysis of electricity usage, by the commercial sector, 2011-16
                                                                                              • Figure 14: Analysis of electricity usage by the commercial sector, 2016
                                                                                            • Scotland
                                                                                              • Northern Ireland
                                                                                              • Electricity Distribution Sector Overview

                                                                                                • Key points
                                                                                                  • Overview
                                                                                                    • Figure 15: Distribution network operators in Great Britain, by region, 2017
                                                                                                  • Size of UK distribution networks
                                                                                                    • Figure 16: UK distribution networks, 2016/17
                                                                                                • Electricity Distribution Market Trends

                                                                                                  • Key points
                                                                                                    • Introduction of competition in network connections
                                                                                                      • Trends in UK electricity supply
                                                                                                          • Figure 17: Analysis of electricity supply in the UK, 2012-16
                                                                                                          • Figure 18: Analysis of electricity supplied in the UK, by type of fuel used in generation, 2011-16
                                                                                                          • Figure 19: Analysis of electricity supplied in the UK, by type of fuel used in generation, 2016
                                                                                                        • Annual Capacity Market auctions are held to help secure the UK’s energy supply
                                                                                                          • Renewables account for a quarter of UK electricity generation in 2016, following rapid expansion in generation capacity
                                                                                                            • Figure 20: Renewable electricity generation in the UK, 2011-16
                                                                                                            • Figure 21: UK renewable electricity generation, 2011-16
                                                                                                            • Figure 22: UK renewable energy market shares, by installed capacity, 2012 and 2017
                                                                                                          • Renewables capacity development pipeline
                                                                                                            • Figure 23: Renewables capacity development pipeline, as of September 2017
                                                                                                          • Distribution price control review
                                                                                                            • Smart grid development to support low carbon economy
                                                                                                              • UK energy storage market set to take-off
                                                                                                                • BEIS and Ofgem set out plans for major upgrade of the UK’s energy systems, including the removal of barriers to storage.
                                                                                                                  • Government unveils £246 million battery investment strategy in July 2017
                                                                                                                    • The Low Carbon Network Fund (LCN) and Electricity Network Innovation Competition (NIC)
                                                                                                                    • Electricity Supply Sector Overview

                                                                                                                      • Key points
                                                                                                                        • Market background
                                                                                                                            • Figure 24: Proportion of domestic electricity customers by supplier type, by region, 2000 and 2017
                                                                                                                          • Supplier switching trends
                                                                                                                            • Figure 25: Number of supplier switches in the domestic gas and electricity markets and share of small suppliers, Great Britain, Q1 2011-Q2 2017
                                                                                                                            • Figure 26: Number of supplier switches in the domestic gas and electricity markets, Great Britain, January 2012-July 2017
                                                                                                                        • Electricity Supply Market Issues & Trends

                                                                                                                          • Key points
                                                                                                                            • Ofgem implemented market reforms in 2014 to promote increased competition and supplier switching
                                                                                                                              • Further market reforms on the way following CMA Energy Market Investigation
                                                                                                                                • Energy retail market facing further government intervention, including price cap on SVTs
                                                                                                                                  • Breakdown of average gas and electricity bill
                                                                                                                                    • Figure 27: Breakdown of average large supplier dual fuel household bill, 2016
                                                                                                                                    • Figure 28: Breakdown of average domestic electricity bill, 2016
                                                                                                                                    • Figure 29: Breakdown of average domestic gas bill, 2016
                                                                                                                                  • ...but many suppliers hike prices in early 2017, citing rising wholesale costs and the cost of delivering government policies
                                                                                                                                    • Competition largely focused on cheap fixed tariffs...
                                                                                                                                      • ...but majority of households remain on more expensive standard variable tariff - reflecting a two-tier energy market
                                                                                                                                          • Figure 30: Average annual bill on SVT versus supplier’s cheapest fixed tariff, by major supplier, July-September 2017
                                                                                                                                        • Independent suppliers are rapidly gaining market share
                                                                                                                                            • Figure 31: Domestic gas supply market shares in Great Britain, by company 2013-17
                                                                                                                                            • Figure 32: Domestic electricity supply market shares in Great Britain, by company 2013-17
                                                                                                                                          • Innovation in tariffs offerings
                                                                                                                                            • Suppliers focus on differentiating their offerings to stay ahead
                                                                                                                                              • Energy suppliers are branching out into multi-utility and home services markets
                                                                                                                                                • Customer service is a key driver of customer loyalty
                                                                                                                                                  • Smart Meter Roll-out programme
                                                                                                                                                    • First-generation (SMETS1) smart meters will need to be upgraded or replaced, as they can revert to being ‘dumb’ if consumers switch supplier
                                                                                                                                                      • Potential benefits and opportunities offered by smart meters
                                                                                                                                                        • Widespread adoption of smart meters will attract new market entrants, including tech firms
                                                                                                                                                          • Smart meters and rise in small scale renewables and storage to open up opportunities for peer-to-peer trading, which would see consumers bypassing suppliers
                                                                                                                                                            • Non-domestic retail market trends
                                                                                                                                                            • Distribution Network Capital Expenditure

                                                                                                                                                              • Key points
                                                                                                                                                                • Capital expenditure
                                                                                                                                                                    • Figure 33: Breakdown of total expenditure by DNOs during DPCR5, by area 2011-15
                                                                                                                                                                  • Gross capital expenditure
                                                                                                                                                                    • Figure 34: UK gross capital expenditure by electricity distribution network operators, 2011/12-2016/17
                                                                                                                                                                    • Figure 35: UK gross capital expenditure by the electricity distribution network operators, 2012/13-2016/17
                                                                                                                                                                    • Figure 36: UK gross capital expenditure by the electricity distribution network operators, by company, 2012/13-2016/17
                                                                                                                                                                    • Figure 37: Total expenditure by electricity distribution network operators in Great Britain, by type, 2015/16
                                                                                                                                                                  • DPCR5 witnesses launch of Low Carbon Networks Fund
                                                                                                                                                                    • Recent years have seen rapid increase in distributed generation connected to DNOs’ networks
                                                                                                                                                                        • Figure 38: Distributed Generation connected to the distribution network during DPCR5, 2011-15
                                                                                                                                                                        • Figure 39: Distributed Generation connected to the distribution network, 2015/16
                                                                                                                                                                      • Forecast expenditure
                                                                                                                                                                        • New price control framework based on Revenue = Incentives + Innovation + Outputs effective from April 2015
                                                                                                                                                                          • Forecast total expenditure
                                                                                                                                                                            • Figure 40: Actual total expenditure in 2015/16, totex allowance and forecasts for RIIO-ED1, by company
                                                                                                                                                                          • Ofgem slashes £200 million from RIIO-ED1 DNO spending allowances in September 2017
                                                                                                                                                                            • Figure 41: Total expenditure forecast for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
                                                                                                                                                                            • Figure 42: Forecast network investment of the electricity distribution network operators in Great Britain, by company, 2015/16-2022/23
                                                                                                                                                                        • Company Profiles Introduction

                                                                                                                                                                          • Key points
                                                                                                                                                                          • Western Power Distribution

                                                                                                                                                                              • Western Power Distribution (East Midlands)
                                                                                                                                                                                • Figure 43: Financial analysis of Western Power Distribution (East Midlands), 2013-17
                                                                                                                                                                              • Western Power Distribution (West Midlands)
                                                                                                                                                                                • Figure 44: Financial analysis of Western Power Distribution (West Midlands), 2013-17
                                                                                                                                                                              • Western Power Distribution (South West)
                                                                                                                                                                                • Figure 45: Financial analysis of Western Power Distribution (South West) 2013-17
                                                                                                                                                                              • Western Power Distribution (South Wales)
                                                                                                                                                                                • Figure 46: Financial analysis of Western Power Distribution (South Wales) 2013-17
                                                                                                                                                                            • UK Power Networks

                                                                                                                                                                                • UK Power Networks: Eastern Power Networks
                                                                                                                                                                                  • Figure 47: Financial analysis of Eastern Power Networks, 2012-17
                                                                                                                                                                                • UK Power Networks: London Power Networks
                                                                                                                                                                                  • Figure 48: Financial analysis of London Power Networks, 2012-17
                                                                                                                                                                                • UK Power Networks: South Eastern Power Networks
                                                                                                                                                                                  • Figure 49: Financial Analysis of South Eastern Power Networks, 2012-17
                                                                                                                                                                              • Northern Powergrid

                                                                                                                                                                                  • Northern Powergrid (Northeast)
                                                                                                                                                                                    • Figure 50: Financial analysis of Northern Powergrid (Northeast), 2012-16
                                                                                                                                                                                  • Northern Powergrid (Yorkshire)
                                                                                                                                                                                    • Figure 51: Financial analysis of Northern Powergrid (Yorkshire), 2012-16
                                                                                                                                                                                • SP Distribution

                                                                                                                                                                                    • SP Manweb
                                                                                                                                                                                      • Figure 52: Financial analysis of SP Manweb, 2012-16
                                                                                                                                                                                    • SP Distribution (South & Central Scotland)
                                                                                                                                                                                      • Figure 53: Financial analysis of SP Distribution, 2012-16
                                                                                                                                                                                  • SSE

                                                                                                                                                                                      • Recent reductions in gas prices for SSE customers
                                                                                                                                                                                        • But SSE hikes electricity prices from April 2017
                                                                                                                                                                                          • Company Strategy and Outlook
                                                                                                                                                                                            • Figure 54: Financial analysis of SSE, 2012-16
                                                                                                                                                                                            • Figure 55: SSE revenue segmental analysis, 2017
                                                                                                                                                                                          • Southern Electric Power Distribution
                                                                                                                                                                                            • Figure 56: Financial analysis of Southern Electric Power Distribution, 2013-17
                                                                                                                                                                                          • Scottish Hydro Electric Power Distribution
                                                                                                                                                                                            • Figure 57: Financial analysis of Scottish Hydro Electric Power Distribution, 2013-17
                                                                                                                                                                                        • Electricity North West

                                                                                                                                                                                              • Figure 58: Financial analysis of Electricity North West, 2013-17
                                                                                                                                                                                          • Northern Ireland Electricity Networks

                                                                                                                                                                                                • Figure 59: Financial analysis of Northern Ireland Electricity Networks, 2012-16
                                                                                                                                                                                            • Centrica/British Gas Trading

                                                                                                                                                                                                • Recent acquisitions and disposals
                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                      • Figure 60: Financial analysis of Centrica, 2012-16
                                                                                                                                                                                                      • Figure 61: Centrica revenue segmental analysis, 2016
                                                                                                                                                                                                    • Following a price freeze in the first half of 2017, British Gas hikes electricity prices by 12.5% from September 2017
                                                                                                                                                                                                      • Focus on innovative Connected Homes Products
                                                                                                                                                                                                        • Company review and outlook
                                                                                                                                                                                                            • Figure 62: Financial analysis of British Gas Trading, 2012-16
                                                                                                                                                                                                        • EDF Energy

                                                                                                                                                                                                            • Planned new UK power stations
                                                                                                                                                                                                              • Smart metering programme
                                                                                                                                                                                                                • Recent price cuts and hikes
                                                                                                                                                                                                                  • Intense competition sees EDF Energy lose more customers in 2016
                                                                                                                                                                                                                    • Figure 63: Financial analysis of EDF Energy, 2012-16
                                                                                                                                                                                                                    • Figure 64: EDF Energy revenue segmental analysis, 2016
                                                                                                                                                                                                                • Npower

                                                                                                                                                                                                                    • Price cuts announced in early 2016...
                                                                                                                                                                                                                      • ...followed by price hike in March 2017
                                                                                                                                                                                                                        • Meridian Energy and Npower launch online energy supplier
                                                                                                                                                                                                                          • Company strategy and outlook
                                                                                                                                                                                                                              • Figure 65: Financial analysis of Npower, 2012-16
                                                                                                                                                                                                                              • Figure 66: RWE - UK Generation & Supply revenue segmental analysis, 2016
                                                                                                                                                                                                                          • E.ON Energy

                                                                                                                                                                                                                              • E.ON cuts gas price in early 2016...
                                                                                                                                                                                                                                • ...but announces a price hike in March 2017, the first in more than three years
                                                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                                                    • Figure 67: Financial analysis of E.ON Energy Solutions, 2012-16
                                                                                                                                                                                                                                    • Figure 68: E.ON revenue segmental analysis, 2016
                                                                                                                                                                                                                                • ScottishPower Energy Retail

                                                                                                                                                                                                                                    • Gas prices cut in early 2016, but dual tariff raised in early 2017
                                                                                                                                                                                                                                      • Company performance & strategy
                                                                                                                                                                                                                                          • Figure 69: Financial analysis of ScottishPower Energy Retail, 2012-16
                                                                                                                                                                                                                                          • Figure 70: ScottishPower revenue segmental analysis, 2016
                                                                                                                                                                                                                                      • Ecotricity Group

                                                                                                                                                                                                                                          • Ecotricity raises energy prices towards the end of 2016
                                                                                                                                                                                                                                            • Company strategy
                                                                                                                                                                                                                                              • Figure 71: Financial analysis of Ecotricity Group, 2012-16
                                                                                                                                                                                                                                          • First Utility

                                                                                                                                                                                                                                              • First Utility diversifies to become multi-utility brand
                                                                                                                                                                                                                                                • Company strategy
                                                                                                                                                                                                                                                  • Figure 72: Financial analysis of First Utility, 2011-15
                                                                                                                                                                                                                                              • Good Energy Group

                                                                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                                                                      • Figure 73: Financial analysis of Good Energy Group, 2012-16
                                                                                                                                                                                                                                                      • Figure 74: Turnover analysis of Good Energy Group, by segment, 2012-16
                                                                                                                                                                                                                                                  • Further Sources & Contacts

                                                                                                                                                                                                                                                    • Trade associations & regulatory bodies
                                                                                                                                                                                                                                                      • Energy UK
                                                                                                                                                                                                                                                        • Energy Networks Association
                                                                                                                                                                                                                                                          • Energy Industries Council
                                                                                                                                                                                                                                                            • Office of Gas and Electricity Markets (Ofgem)
                                                                                                                                                                                                                                                              • Office of Gas and Electricity Markets - Scotland (Ofgem Scotland)
                                                                                                                                                                                                                                                                • Office of Gas and Electricity Markets - Wales (Ofgem Wales)
                                                                                                                                                                                                                                                                  • Trade magazines
                                                                                                                                                                                                                                                                    • Energy Now
                                                                                                                                                                                                                                                                      • Modern Power Systems
                                                                                                                                                                                                                                                                        • Utility Week
                                                                                                                                                                                                                                                                          • Trade exhibitions
                                                                                                                                                                                                                                                                            • Energy4PowerLive
                                                                                                                                                                                                                                                                              • All-Energy Exhibition & Conference 2018
                                                                                                                                                                                                                                                                                • edie live 2018

                                                                                                                                                                                                                                                                                Electricity Industry - UK - November 2017

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