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Electricity Supply and Distribution (Industrial Report) - UK - June 2014

“The country’s ageing infrastructure assets continue to drive capital investment in the electricity distribution industry. Distribution network operators are also ramping up investment in new technologies to accommodate higher quantities of distributed generation and low carbon technologies on the grid.”

– Claudia Preedy, Industrial Analyst

This report will explore the following key questions facing the UK electricity supply and distribution industry:

  • 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 distribution network operators (DNOs)?
  • What are the expenditure plans of individual DNOs for the next price control period RIIO-ED1?
  • What are the major challenges facing the electricity supply sector?

The terms of reference for this report are predominately the 15 DNOs in the UK, comprising 12 in England and Wales (though some are now grouped within broader companies), two vertically integrated companies in Scotland, and one in Northern Ireland. The report examines the capital expenditure of those companies, and their financial performance, as well as providing an insight into the key challenges facing the industry. The report also covers the electricity supply sector, providing an analysis of its key competitors and issues.

The electricity industry in Great Britain explained:

  • Electricity generation refers to companies producing electricity in power stations that operate under generation licences. Generation prices are not regulated in England and Wales, though prices for the vertically integrated ScottishPower and Scottish Hydro-Electric, which generate for their monopoly markets, are indirectly regulated through supply price controls.
  • Transmission refers to transmitting electricity from power stations through high voltage wires, with the system extending across Britain and nearby offshore waters. Transmission activities are monopolies operating under transmission licences. The transmission system is owned and maintained by regional transmission companies, while the system as a whole is operated by a single System Operator (SO). This role is performed by National Grid Electricity Transmission (NGET), which is responsible for ensuring the stable and secure operation of the whole transmission system. In Scotland, both Scottish Power and Scottish Hydro-Electric own and operate transmission systems. The transmission sector is regulated through price control periods, where Ofgem sets the maximum amount of revenue that operators can recover from users.
  • Distribution refers to the 14 DNOs in England, Scotland and Wales, including two Scottish companies that own and operate lower voltage distribution systems for taking electricity from transmission systems to customers' premises. These are owned by seven different groups. There are also six independent network operators, which own and run smaller networks embedded in DNO networks. DNOs are monopolies because there is only one owner/operator for each area. Ofgem administers a price control regime to ensure that efficient distributors can earn a fair return after capital and operating costs, while still limiting the amount customers can be charged.
  • The supply of electricity involves buying electricity and selling it on to customers, billing, customer services and the collection of customer accounts. Suppliers buy energy from the wholesale market or directly from generators and arrange for it to be delivered to the end consumer. They set the prices that consumers pay for the electricity that they use. Full competition was introduced into Britain’s electricity retail market in 1999.

Capital expenditure is defined by Ofgem as any expenditure which, for the purpose of the regulatory accounts, has been included in the value of the fixed assets of a distribution business provided that:

(a) the expenditure conforms with at least one of the following:

  • The expenditure relates to the purchase, development or construction of a new asset
  • The expenditure will increase the capacity or functionality of the distribution assets
  • The expenditure will significantly reduce the ongoing maintenance of the assets
  • The expenditure will extend the service life of distribution assets beyond that expected when the assets were originally installed

(b) the expenditure is determined in accordance with applicable accounting standards.

Capital expenditure excludes the following:

  • Renewal and replacement of insulation medium in switchgear, whether reprocessed or not
  • Capitalised interest
  • Revaluation amounts

Faults costs are defined as the reactive replacement of a system asset following an occurrence where the asset’s functional failure has resulted in an unplanned incident and where the asset must be replaced before full system functionality can be restored. This includes expenditure incurred following an unplanned incident, as defined for Quality of Service reporting, where such costs are the result of physically replacing assets to return them to their pre-incident performance. Fault costs cease when supplies have been restored, rectification works have been completed and the DNO foresees no further work to be required to achieve pre-incident performance.

However, this excludes:

  • All costs where assets are not replaced
  • The cost of planned asset replacement
  • Replacement of assets that have faulted in the past (on one or more occasions), have been repaired and returned to operation and are subsequently replaced as a planned activity due to an assessment of their condition (not in response to a particular unplanned incident occurring)

Load related new connections and reinforcements costs include new system assets installed on the network as a result of a new customer connection (contestable and non-contestable works), reinforcement as a result of a new connection, and general reinforcement required due to changes in demand on the system.

Non-Load, non-fault new and replacement assets costs include the installation of new assets and the planned installation of replacement assets for reasons other than fault replacement or load-related reasons. Related expenditure refers to spending on maintaining the integrity, safety and performance of the distribution network.

Non-operational capital costs are defined as spending on new and replacement assets that are not system assets. This includes:

  • Vehicles (including mobile plant and generators)
  • Plant and machinery
  • Small tools and equipment
  • Office equipment
  • Land and buildings used for administrative purposes
  • IT and telecoms
  • IT software upgrade costs

Engineering indirects costs include activities of network policy, network design, project management and engineering management and clerical support.

Network indirects costs refer to activities of wayleave administration, control centre, system mapping, call centre, stores and procurements, vehicles and transport, health and safety, and operational training.

Business support costs include activities of IT and telecoms, property management, HR and non-operational training, finance and regulation, CEO, etc.

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Table of contents

  1. Executive Summary

      • The market
        • Gross capital spending driven by asset replacement and refurbishment activity
          • Figure 1: UK gross capital expenditure by the electricity distribution network operators, 2008/09-2012/13
        • Major variations in gross capital spending by geographical area
          • Figure 2: UK gross capital expenditure by the electricity distribution network operators, by company, 2008/09-2012/13
        • Non-load related capital spending to dominate network investment between 2015 and 2023, reflecting asset replacement requirements
          • Innovation to focus on smart grid technologies to facilitate the transition to a low-carbon economy
            • Low Carbon Network Fund provides support to DNOs to trial new technologies
              • Figure 3: Forecast network investment of the electricity distribution network operators in Great Britain, 2015/16-2022/23
            • Electricity supply market dominated by the ‘big six’ energy suppliers, with a combined market share of more than 90%
              • Average dual fuel bills more than doubled over the last 10 years
                • Figure 4: Breakdown of average domestic electricity household bill, as of January 2013
              • Roll-out of smart meters at centre of key changes to energy supply markets over the next few years
                • Market factors
                  • DNOs subject to price controls set by industry regulator Ofgem
                    • Decarbonisation of UK economy to increase loads placed on distribution network
                      • Renewables Obligation leading to rise in Distributed Generation
                        • Renewable Heat Incentive (RHI) promotes take-up of heat pumps
                          • Energy Company Obligation (ECO) scheme and Green Deal
                            • Ofgem market review – Reforming the electricity retail market
                              • Companies
                                • Electricity distribution Industry
                                  • Introduction of competition in network connections
                                    • Electricity supply Industry
                                      • Proposed CMA investigation could lead to break-up of ‘big six’ energy suppliers
                                        • What we think
                                        • Introduction

                                            • Definitions
                                              • Methodology
                                                • Abbreviations
                                                  • Market positioning
                                                    • Great Britain
                                                      • Northern Ireland
                                                      • Economy

                                                          • Inflation
                                                            • Interest rates
                                                              • Business investment
                                                              • Market Factors

                                                                • Price controls
                                                                  • Environmental and legislative factors
                                                                    • Climate Change Programme (including Climate Change Levy and Agreement)
                                                                      • Carbon Plan
                                                                        • Green Deal & Energy Company Obligation (ECO)
                                                                          • Ofgem Retail Market Review
                                                                            • Electricity Market Reform
                                                                              • Renewables obligation
                                                                                • The Renewable Heat Incentive
                                                                                  • Combined Heat and Power
                                                                                  • Distribution Industry Structure

                                                                                    • Key points
                                                                                      • Industry overview
                                                                                          • Figure 5: Ownership of the distribution network operators in the UK, as of May 2014
                                                                                        • Regional electricity demand
                                                                                          • Figure 6: Electricity consumed in Great Britain, by region, 2012
                                                                                          • Figure 7: Regional proportional importance of electricity consumed in Great Britain, 2012
                                                                                        • Electricity consumption by end-use sector
                                                                                          • Figure 8: Analysis of electricity usage, by type of industry, UK, 2005-12
                                                                                          • Figure 9: Analysis of electricity usage, by the commercial sector, 2008-12
                                                                                          • Figure 10: Analysis of electricity usage graph, by the commercial sector, 2008-12
                                                                                        • Scotland
                                                                                          • Northern Ireland
                                                                                          • Electricity Distribution Sector Overview

                                                                                            • Key points
                                                                                              • Overview
                                                                                                • Figure 11: Distribution network operators in Great Britain, by region, 2014
                                                                                              • Size of UK distribution networks
                                                                                                • Figure 12: UK distribution networks, 2012/13
                                                                                            • Electricity Distribution Market Trends

                                                                                              • Key points
                                                                                                • Introduction of Competition in Network Connections
                                                                                                  • Trends in UK Electricity Supply
                                                                                                      • Figure 13: Analysis of electricity supply in the UK, 2009-13
                                                                                                      • Figure 14: Analysis of electricity supplied in the UK, by type of fuel used in generation, 2009-13
                                                                                                      • Figure 15: Analysis of electricity supplied in the UK, by type of fuel used in generation, 2013
                                                                                                    • Smart Grid Development to Support Low Carbon Economy
                                                                                                        • Figure 16: Renewable electricity generation in the UK, 2009-13
                                                                                                        • Figure 17: Renewable electricity generation in the UK graph, 2009-13
                                                                                                      • Distribution Price Control Review
                                                                                                        • The Low Carbon Network Fund (LCN)
                                                                                                          • Electricity North West
                                                                                                            • Northern Powergrid
                                                                                                              • SP Energy Networks
                                                                                                                • SSE
                                                                                                                  • UK Power Networks
                                                                                                                    • Western Power Distribution
                                                                                                                    • Electricity Supply Sector Overview

                                                                                                                      • Key points
                                                                                                                        • Market background
                                                                                                                            • Figure 18: Proportion of domestic electricity customers by supplier type, by region, 2000 and 2012
                                                                                                                        • Electricity Supply Market Issues

                                                                                                                          • Key points
                                                                                                                            • Rise in Energy Bills and Dominance of the ‘Big Six’ Suppliers
                                                                                                                                • Figure 19: Breakdown of average domestic electricity household bill, as of January 2013
                                                                                                                                • Figure 20: Breakdown of average domestic electricity household bill graph, as of January 2013
                                                                                                                              • Increased Competition from Smaller Suppliers
                                                                                                                                • Smart Meter Roll-out
                                                                                                                                • Capital Expenditure

                                                                                                                                  • Key points
                                                                                                                                    • Capital expenditure
                                                                                                                                        • Figure 21: UK gross capital expenditure by the electricity distribution network operators, 2008/09-2012/13
                                                                                                                                        • Figure 22: UK gross capital expenditure by the electricity distribution network operators graph, 2008/09-2012/13
                                                                                                                                        • Figure 23: UK gross capital expenditure by the electricity distribution network operators, by company, 2008/09-2012/13
                                                                                                                                      • Forecast capital expenditure
                                                                                                                                        • Capital spending during price control period 2010-15 focussed on asset replacement
                                                                                                                                          • New price control framework based on Revenue = Incentives+Innovation+ Outputs to come into effect from April 2015
                                                                                                                                            • Maintain reputational incentive for business carbon footprint (BCF)
                                                                                                                                                • Figure 24: Proposed total expenditure for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
                                                                                                                                                • Figure 25: Proposed total expenditure for RIIO-ED1 in Great Britain graph, by company, 2015/16-2022/23
                                                                                                                                                • Figure 26: Forecast network investment of the electricity distribution network operators in Great Britain, by company, 2015/16-2022/23
                                                                                                                                              • DNOs
                                                                                                                                                • Western Power Distribution
                                                                                                                                                    • Figure 27: Core activity costs by Western Power Distribution, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 28: Asset replacement expenditure by Western Power Distribution, by type and company, 2016-23
                                                                                                                                                    • Figure 29: Capital expenditure planned by Western Power Distribution for the West Midlands, by type, 2016-21
                                                                                                                                                    • Figure 30: Capital expenditure planned by Western Power Distribution for the East Midlands, by type, 2016-21
                                                                                                                                                    • Figure 31: Capital expenditure planned by Western Power Distribution for South Wales, by type, 2016-21
                                                                                                                                                    • Figure 32: Capital expenditure planned by Western Power Distribution for the South West, by type, 2016-21
                                                                                                                                                  • UK Power Networks
                                                                                                                                                    • Figure 33: Activity costs by UK Power Networks, 2011-15 and 2016-23
                                                                                                                                                    • Figure 34: Activity costs by UK Power Networks graph, 2011-15 and 2016-23
                                                                                                                                                    • Figure 35: Asset investment by UK Power Networks, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 36: Capital expenditure planned by London Power Networks, by type, 2016-21
                                                                                                                                                    • Figure 37: Capital expenditure planned by Eastern Power Networks, by type, 2016-21
                                                                                                                                                    • Figure 38: Capital expenditure planned by South Eastern Power Networks, by type, 2016-21
                                                                                                                                                  • Northern Powergrid
                                                                                                                                                    • Figure 39: Activity costs by Northern Powergrid, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 40: Comparison of average annual activity costs by Northern Powergrid, 2011-15 and 2016-23
                                                                                                                                                    • Figure 41: Network investment by Northern Powergrid, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 42: Capital expenditure by Northern Powergrid (Northeast), by type, 2011-15
                                                                                                                                                    • Figure 43: Capital expenditure planned by Northern Powergrid (Northeast), by type, 2016-21
                                                                                                                                                    • Figure 44: Capital expenditure by Northern Powergrid (Yorkshire), by type, 2011-15
                                                                                                                                                    • Figure 45: Capital expenditure planned by Northern Powergrid (Yorkshire), by type, 2016-21
                                                                                                                                                  • SP Energy Networks
                                                                                                                                                    • Figure 46: Activity costs by SP Energy Networks, 2011-15 and 2016-23
                                                                                                                                                    • Figure 47: Comparison of average annual activity costs by SP Energy Networks, 2011-15 and 2016-23
                                                                                                                                                    • Figure 48: Asset replacement expenditure by SP Energy Networks, by asset type, 2016-23
                                                                                                                                                    • Figure 49: Capital expenditure planned by SP Distribution, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 50: Capital expenditure planned by SP Manweb, by type, 2011-15 and 2016-23
                                                                                                                                                  • Electricity North West
                                                                                                                                                    • Figure 51: Activity costs by Electricity North West, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 52: Comparison of average annual activity costs by Electricity North West, 2011-15 and 2016-23
                                                                                                                                                    • Figure 53: Asset investment by Electricity North West, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 54: Planned expenditure by Electricity North West, by type, 2014-21
                                                                                                                                                  • Scottish and Southern Energy Power Distribution
                                                                                                                                                    • Figure 55: Core activity costs by Scottish and Southern Energy Power Distribution, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 56: Comparison of average annual activity costs by Southern Energy Power Distribution, 2011-15 and 2016-23
                                                                                                                                                    • Figure 57: Asset Investment by Scottish and Southern Energy Power distribution, by type, 2011-15 and 2016-23
                                                                                                                                                    • Figure 58: Capital expenditure planned by Scottish Hydro Energy Power Distribution, by type, 2016-23
                                                                                                                                                    • Figure 59: Capital expenditure planned by Southern Energy Power Distribution, by type, 2016-23
                                                                                                                                                  • Northern Ireland Electricity
                                                                                                                                                    • Figure 60: Capital expenditure by NIE Transmission and Distribution, 2008/09-2012/13
                                                                                                                                                    • Figure 61: Capital expenditure determination for NIE Transmission and Distribution, 2012/13-2016/17
                                                                                                                                                • Company Profiles Introduction

                                                                                                                                                  • Key points
                                                                                                                                                  • Western Power Distribution

                                                                                                                                                      • Western Power Distribution (East Midlands)
                                                                                                                                                        • Figure 62: Financial analysis of Western Power Distribution (East Midlands), 2008-13
                                                                                                                                                      • Western Power Distribution (West Midlands)
                                                                                                                                                        • Figure 63: Financial analysis of Western Power Distribution (West Midlands), 2008-13
                                                                                                                                                      • Western Power Distribution (South West)
                                                                                                                                                        • Figure 64: Financial analysis of Western Power Distribution (South West), 2009-13
                                                                                                                                                      • Western Power Distribution (South Wales)
                                                                                                                                                        • Figure 65: Financial analysis of Western Power Distribution (South Wales), 2008-12
                                                                                                                                                    • UK Power Networks

                                                                                                                                                        • UK Power Networks: Eastern Power Networks
                                                                                                                                                          • Figure 66: Financial analysis of Eastern Power Networks, 2008-12
                                                                                                                                                        • UK Power Networks: London Power Networks
                                                                                                                                                          • Figure 67: Financial analysis of London Power Networks, 2008-12
                                                                                                                                                        • UK Power Networks: South Eastern Power Networks
                                                                                                                                                          • Figure 68: Financial analysis of South Eastern Power Networks, 2008-12
                                                                                                                                                      • Northern Powergrid

                                                                                                                                                          • Northern Powergrid (Northeast)
                                                                                                                                                            • Figure 69: Financial analysis of Northern Powergrid (Northeast), 2009-13
                                                                                                                                                          • Northern Powergrid (Yorkshire)
                                                                                                                                                            • Figure 70: Financial analysis of Northern Powergrid (Yorkshire), 2009-13
                                                                                                                                                        • SP Distribution

                                                                                                                                                            • SP Manweb
                                                                                                                                                              • Figure 71: Financial analysis of SP Manweb, 2008-12
                                                                                                                                                            • SP Distribution (South & Central Scotland)
                                                                                                                                                              • Figure 72: Financial analysis of SP Distribution, 2008-12
                                                                                                                                                          • SSE

                                                                                                                                                                • Figure 73: Financial analysis of SSE, 2009-13
                                                                                                                                                                • Figure 74: Turnover analysis of SSE, by business segment, 2012-13
                                                                                                                                                              • Southern Electric Power Distribution
                                                                                                                                                                • Figure 75: Financial analysis of Southern Electric Power Distribution, 2009-13
                                                                                                                                                              • Scottish Hydro Electric Power Distribution
                                                                                                                                                                • Figure 76: Financial analysis of Scottish Hydro Electric Power Distribution, 2008-13
                                                                                                                                                            • Electricity North West

                                                                                                                                                                  • Figure 77: Financial analysis of Electricity North West, 2009-13
                                                                                                                                                              • Northern Ireland Electricity

                                                                                                                                                                    • Figure 78: Financial analysis of Northern Ireland Electricity, 2010-13
                                                                                                                                                                • British Gas Trading

                                                                                                                                                                      • Figure 79: Financial analysis of British Gas Trading, 2008-12
                                                                                                                                                                  • EDF Energy

                                                                                                                                                                        • Figure 80: Financial analysis of EDF Energy, 2008-12
                                                                                                                                                                    • NPower

                                                                                                                                                                          • Figure 81: Financial analysis of Npower, 2008-12
                                                                                                                                                                      • E.ON Energy

                                                                                                                                                                            • Figure 82: Financial analysis of E.ON Energy Solutions, 2008-12
                                                                                                                                                                            • Figure 83: Turnover breakdown for E.ON, 2012
                                                                                                                                                                        • Scottishpower Energy Retail

                                                                                                                                                                            • Figure 84: Financial analysis of ScottishPower Energy Retail, 2008-12
                                                                                                                                                                        • First Utility

                                                                                                                                                                              • Figure 85: Financial analysis of First Utility, 2008-12
                                                                                                                                                                          • Further Sources and Contacts

                                                                                                                                                                            • Trade associations and regulatory bodies
                                                                                                                                                                              • Trade magazines
                                                                                                                                                                                • Trade exhibitions

                                                                                                                                                                                Companies Covered

                                                                                                                                                                                To learn more about the companies covered in this report please contact us.

                                                                                                                                                                                Electricity Supply and Distribution (Industrial Report) - UK - June 2014

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