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Gas Supply and Distribution - UK - March 2015

“Ofgem has adopted a new regulatory framework for the current price control period for gas distribution and transmission networks, known as the RIIO model. A key element of the RIIO approach is that it gives greater focus to incentives and innovation than the previous regulatory regime. This means new technologies and innovation play a more pivotal role in the efficient operation of the infrastructure network and in achieving operational cost savings. Under the new framework, companies are also required to take a more long-term approach to infrastructure investment decisions, with an increased focus on active asset management over traditional network investment.”
– Claudia Preedy, Industrial Analyst

This report answers the following key questions:

  • What are the key drivers for replacement expenditure by gas distribution network operators?
  • What are the key effects of Ofgem’s new regulatory framework, the RIIO model, on the distribution network operators’ approach to infrastructure management and investment?
  • Have Ofgem’s settlements for RIIO-GD1 been too generous?
  • What are the key findings to date by the ongoing CMA inquiry into the energy market?

During 2013/14, the first year of the eight-year RIIO-GD1 control period, all gas distribution networks operators came in below the regulator’s cost allowances and outperformed their targets. This resulted in Ofgem being criticised by the Energy and Climate Change Select Committee (ECCC) for being too generous in its cost allowances, while performance targets were also deemed too low. The ECCC has called for market conditions to be improved in the short term by conducting interim independent audits of price controls and increasing the notification period network companies must allow for price changes to 15 months.

This is likely to increase pressure on gas distribution network operators to reduce charges, particularly with high household energy bills remaining a political hot potato and network costs making up almost a quarter of dual fuel bills.

The terms of reference for this report concern the UK gas distribution and supply sector, comprising the downstream activities of supply to the industrial, commercial and domestic sectors.

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Table of contents

  1. Executive Summary

      • The market
        • UK gas demand in decline
          • Demand for gas from the domestic sector strongly influenced by winter temperatures
            • Figure 1: Gas consumption by key end use sectors, 2010-14
          • Gas distribution and transmission industry report reduced capital expenditure in 2013/14
            • Figure 2: Total gas transmission and distribution capital expenditure, 2009/10-2013/14
          • Gas distribution network operators’ capital expenditure in 2013/14 comes in below allowances set by Ofgem during 2013/14
            • Market factors
              • UK increasingly dependent on natural gas imports
                • Figure 3: UK gas supply, 2010-14
              • UK’s shale gas potential remains largely unknown
                • Wholesale gas prices down by an estimated 20% in 2014
                  • Figure 4: Average wholesale gas prices, 2002-14
                • New regulatory framework introduced for current control period
                  • Companies
                    • Transmission and distribution industry structure
                      • Gas supply industry continues to be dominated by ‘big six’ energy firms
                        • Increased competition from new market entrants in energy retail market
                          • What we think
                          • Key Insights

                              • What are the key drivers for replacement expenditure by gas distribution network operators?
                                • What are the key effects of Ofgem’s new regulatory framework, the RIIO model, on the distribution network operators’ approach to infrastructure management and investment?
                                  • Have Ofgem’s settlements for RIIO-GD1 been too generous?
                                    • What are the key findings to date by the ongoing CMA inquiry into the energy market?
                                    • Introduction

                                        • Definitions
                                          • Methodology
                                            • Abbreviations
                                            • Market Positioning

                                              • Key points
                                                • Overview
                                                  • Customers
                                                    • Suppliers
                                                    • UK Economy

                                                      • Overview
                                                        • Inflation
                                                          • Interest rates
                                                            • Consumer spending
                                                              • Business investment
                                                              • Market Factors

                                                                • Key points
                                                                  • Social factors
                                                                    • Economic factors
                                                                      • The UK’s increased reliance on gas imports
                                                                        • Potential for shale gas extraction
                                                                          • Wholesale gas prices
                                                                            • Figure 5: Average wholesales gas prices, 2002-14
                                                                          • Environmental and legislative factors
                                                                            • Climate Change Programme (including Climate Change Levy, Agreement and efficiency measures)
                                                                              • Emissions Trading Scheme
                                                                                • Combined heat and power
                                                                                  • EU Renewables Directives
                                                                                    • UK renewables policy
                                                                                      • Renewables Obligation (RO)
                                                                                        • FeedIn Tariffs (FITs)
                                                                                          • The Renewable Heat Incentive
                                                                                            • National Emission Ceilings Directive
                                                                                              • Carbon Emission Reduction Target (CERT) and Community Energy Saving Programme (CESP)
                                                                                                • Energy Company Obligation (ECO)
                                                                                                • UK Gas Demand and Supply

                                                                                                  • Key points
                                                                                                    • Overview
                                                                                                      • UK gas demand in decline
                                                                                                        • Figure 6: Segmentation of industrial gas consumption, by end use industries, UK, 2009-13
                                                                                                        • Figure 7: Segmentation of gas consumption, by non-industrial sectors, UK, 2009-13
                                                                                                        • Figure 8: Industrial and non-industrial gas consumption, 2009-13
                                                                                                      • Power generation
                                                                                                          • Figure 9: Gas supplied for electricity generation, UK, 2010-14
                                                                                                        • Interruptible
                                                                                                          • Industrial
                                                                                                            • Figure 10: Gas supplied to the industrial sector, UK, 2010-14
                                                                                                          • Commercial
                                                                                                            • Figure 11: Gas supplied to the UK commercial sector, 2009-13
                                                                                                          • Domestic
                                                                                                            • Figure 12: Analysis of the development of gas supplied to the UK domestic sector, 2010-14
                                                                                                            • Figure 13: Segmentation of the UK domestic central heating installations, by type of fuel, 2009-13
                                                                                                            • Figure 14: Segmentation of UK domestic central heating installations, by type of fuel, 2013
                                                                                                            • Figure 15: UK installed base of central heating systems, by type of fuel, 1970-2012
                                                                                                          • Regional demand
                                                                                                            • Figure 16: Gas sales and customers by region, Great Britain, 2013
                                                                                                          • Northern Ireland gas market
                                                                                                            • Gas supply
                                                                                                                • Figure 17: Total gas supply, UK, 2010-14
                                                                                                                • Figure 18: Development of the UK gas supply, 2010-14
                                                                                                            • Gas Transmission and Distribution Capital Expenditure

                                                                                                              • Key points
                                                                                                                • Capital expenditure
                                                                                                                  • The market 2010-14
                                                                                                                    • Figure 19: Total gas transmission and distribution capital expenditure, 2009/10-2013/14
                                                                                                                    • Figure 20: Total gas transmission capital expenditure, 2009/10-13/14
                                                                                                                    • Figure 21: Total gas distribution capital expenditure, 2009/10-2013/14
                                                                                                                    • Figure 22: Total gas transmission and distribution capital expenditure, 2009/102013/14
                                                                                                                    • Figure 23: Cumulative capital expenditure during GDPRC1 2008-13, by GDN and type
                                                                                                                  • Replacement expenditure (Repex)
                                                                                                                      • Figure 24: Length of gas mains replaced, by distribution network operator, 2009-13
                                                                                                                      • Figure 25: Cumulative replacement expenditure during GDPRC1 2008-13, by GDN and type
                                                                                                                    • Individual companies
                                                                                                                      • National Grid Gas
                                                                                                                        • Figure 26: Gas transmission and distribution capital expenditure by National Grid Gas, 2009/10-2013/14
                                                                                                                      • Northern Gas Networks
                                                                                                                        • Figure 27: Gas distribution capital expenditure by Northern Gas Networks, 2009/10-2013/14
                                                                                                                      • Scottish Gas Networks
                                                                                                                        • Figure 28: Gas distribution capital expenditure by Scottish Gas Networks, 2009/10-2013/14
                                                                                                                      • Southern Gas Networks
                                                                                                                        • Figure 29: Gas distribution capital expenditure by Southern Gas Networks, 2009/10-2013/14
                                                                                                                      • Wales and West Utilities
                                                                                                                        • Figure 30: Gas distribution capital expenditure by Wales and West Utilities, 2009/10-2013/14
                                                                                                                    • Forecast Capital Expenditure

                                                                                                                      • Key points
                                                                                                                        • Overview
                                                                                                                            • Figure 31: Ofgem’s required expansion of the number of properties to alleviate fuel poverty, 2013-21
                                                                                                                          • Innovation at centre of new price control model for gas distribution and transmission network
                                                                                                                            • Transmission network
                                                                                                                                • Figure 32: Capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-21
                                                                                                                                • Figure 33: Annual capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-21
                                                                                                                              • Distribution network
                                                                                                                                • Figure 34: Controllable cost allowances for gas distribution companies under (RIIOGD1), 2014-21
                                                                                                                                • Figure 35: Annual capex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                • Figure 36: Annual repex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                • Figure 37: Forecast total capex and repex during RIIOGD1, 2013/142020/21
                                                                                                                              • Individual companies
                                                                                                                                • Northern Gas Networks
                                                                                                                                  • Figure 38: Northern Gas Networks capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 39: Northern Gas Networks capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • Scotland Gas Networks
                                                                                                                                  • Figure 40: Scotland Gas Networks capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 41: Scotland Gas Networks capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • Southern Gas Networks
                                                                                                                                  • Figure 42: Southern Gas Networks capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 43: Southern Gas Networks capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • Wales and West Utilities (WWU)
                                                                                                                                  • Figure 44: WWU capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 45: WWU capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • NGG East of England
                                                                                                                                  • Figure 46: NGG East of England capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 47: NGG East of England capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • NGG London
                                                                                                                                  • Figure 48: NGG London capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 49: NGG London capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • NGG North West
                                                                                                                                  • Figure 50: NGG North West capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 51: NGG North West capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                • NGG West Midlands
                                                                                                                                  • Figure 52: NGG West Midlands capex and repex, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                                  • Figure 53: NGG West Midlands capex and repex workload, 2013/14 (actual) and 2014/15-2020/21 (planned)
                                                                                                                              • Structure of the Gas Distribution Industry

                                                                                                                                • Key points
                                                                                                                                  • Development and structure of the gas industry
                                                                                                                                    • Industry structure
                                                                                                                                      • Industry development
                                                                                                                                          • Figure 54: Structure of the distribution network operators, as of February 2015
                                                                                                                                        • Competition in network connections
                                                                                                                                        • National Grid Gas

                                                                                                                                            • National Grid Gas’ innovation strategy
                                                                                                                                                • Figure 55: Financial analysis of National Grid Gas, 2010-14
                                                                                                                                            • Northern Gas Networks

                                                                                                                                                  • Figure 56: Financial analysis of Northern Gas Networks, 2009-13
                                                                                                                                              • Scotland Gas Networks

                                                                                                                                                    • Figure 57: Financial analysis of Scotland Gas Networks, 2010-14
                                                                                                                                                • Southern Gas Networks

                                                                                                                                                      • Figure 58: Financial analysis of Southern Gas Networks, 2010-14
                                                                                                                                                  • Wales and West Utilities

                                                                                                                                                      • Figure 59: Financial analysis of Wales & West Utilities, 2010-13
                                                                                                                                                  • Gas Supply Industry

                                                                                                                                                    • Key points
                                                                                                                                                      • Overview and recent industry developments
                                                                                                                                                        • ‘Big Six’ suppliers under fire over rising prices
                                                                                                                                                          • ‘Big six’ challenged by small independent suppliers
                                                                                                                                                            • Energy suppliers cut gas prices in early 2015
                                                                                                                                                              • CMA inquiry into energy market
                                                                                                                                                              • Centrica/British Gas Trading

                                                                                                                                                                    • Figure 60: Financial analysis of Centrica, 2009-13
                                                                                                                                                                    • Figure 61: Centrica revenue segmental analysis, 2013
                                                                                                                                                                    • Figure 62: Financial analysis of British Gas Trading, 2009-13
                                                                                                                                                                • EDF Energy

                                                                                                                                                                      • Figure 63: Financial analysis of EDF Energy, 2009-13
                                                                                                                                                                      • Figure 64: EDF Energy revenue segmental analysis, 2013
                                                                                                                                                                  • RWE Npower

                                                                                                                                                                        • Figure 65: Financial analysis of Npower, 2009-13
                                                                                                                                                                        • Figure 66: RWE - UK revenue segmental analysis, 2013
                                                                                                                                                                    • E.ON Energy

                                                                                                                                                                          • Figure 67: Financial analysis of E.ON Energy Solutions, 2009-13
                                                                                                                                                                          • Figure 68: E.ON revenue segmental analysis, 2013
                                                                                                                                                                      • ScottishPower Energy Retail

                                                                                                                                                                          • Figure 69: Financial analysis of ScottishPower Energy Retail, 2009-13
                                                                                                                                                                          • Figure 70: ScottishPower revenue segmental analysis, 2013
                                                                                                                                                                      • Sse

                                                                                                                                                                            • Figure 71: Financial analysis of SSE, 2010-14
                                                                                                                                                                            • Figure 72: SSE revenue segmental analysis, 2014
                                                                                                                                                                        • Ecotricity Group

                                                                                                                                                                              • Figure 73: Financial analysis of Ecotricity Group, 2010-14
                                                                                                                                                                          • First Utility

                                                                                                                                                                                • Figure 74: Financial analysis of First Utility, 2009-13
                                                                                                                                                                            • Good Energy Group

                                                                                                                                                                                  • Figure 75: Financial analysis of Good Energy Group, 2009-13
                                                                                                                                                                                  • Figure 76: Turnover analysis of Good Energy Group, by segment, 2012-13
                                                                                                                                                                              • Future Gas Demand

                                                                                                                                                                                • Key points
                                                                                                                                                                                  • The market
                                                                                                                                                                                      • Figure 77: Forecast UK gas demand, 2015-35
                                                                                                                                                                                      • Figure 78: Forecast UK gas demand, 2015-35
                                                                                                                                                                                      • Figure 79: Forecast gas demand, by sector, 2015-35
                                                                                                                                                                                      • Figure 80: Forecast UK gas demand by sector under “slow progression” scenario, 2013-22
                                                                                                                                                                                      • Figure 81: Forecast UK gas demand by sector under “gone green” scenario, 2013-22
                                                                                                                                                                                      • Figure 82: Forecast UK gas demand by sector under “no progression” scenario, 2013-22
                                                                                                                                                                                      • Figure 83: Forecast UK gas demand by sector under “low carbon life” scenario, 2013-22
                                                                                                                                                                                    • Domestic demand
                                                                                                                                                                                      • Home insulation
                                                                                                                                                                                        • Smart meters programme
                                                                                                                                                                                          • Heat pumps
                                                                                                                                                                                            • Industrial/commercial demand
                                                                                                                                                                                              • Power generation demand
                                                                                                                                                                                                  • Figure 84: Forecast power generation installed capacity under “slow progression” scenario, by source, 2015-35
                                                                                                                                                                                                  • Figure 85: Forecast power generation installed capacity under “gone green” scenario, by source, 2015-35
                                                                                                                                                                                                  • Figure 86: Forecast power generation installed capacity under “no progression” scenario, by source, 2015-35
                                                                                                                                                                                                  • Figure 87: Forecast power generation installed capacity under “low carbon life” scenario, by source, 2014-35
                                                                                                                                                                                                • Imports
                                                                                                                                                                                                    • Figure 88: Existing UK gas import infrastructure, as of December 2014
                                                                                                                                                                                                    • Figure 89: Proposed UK import projects, as of December 2014
                                                                                                                                                                                                  • Exports
                                                                                                                                                                                                  • Further Sources and Contacts

                                                                                                                                                                                                    • Trade associations and regulatory bodies
                                                                                                                                                                                                      • Energy Networks Association
                                                                                                                                                                                                        • 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)
                                                                                                                                                                                                              • Society of British Gas Industries
                                                                                                                                                                                                                • Trade exhibitions
                                                                                                                                                                                                                  • Offshore Europe 2015
                                                                                                                                                                                                                    • Sustainability Live 2015
                                                                                                                                                                                                                      • Trade magazines
                                                                                                                                                                                                                        • Modern Utility Management
                                                                                                                                                                                                                          • Utility Week

                                                                                                                                                                                                                          Companies Covered

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

                                                                                                                                                                                                                          Gas Supply and Distribution - UK - March 2015

                                                                                                                                                                                                                          £995.00 (Excl.Tax)