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Gas Supply and Distribution - UK - March 2016

“During the current control period RIIO-GD1 from 2013 to 2021, asset management and demand-side responses (working with consumers to reduce demand rather than increase generation) are likely to be the most significant areas of innovation, with smart technology expected to play a key role. Increased collaboration between network operators is also anticipated to be key to innovation across the sector. The industry is also increasingly adopting a “co-opetition” approach, with competitors coming together to co-operate strategically and innovate for their mutual benefit.”
– Claudia Preedy - B2B analyst

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

  • What have been the patterns in gas consumption by key end-use industries in recent years?
  • What are the projections for annual gas demand by key end-use industries up to 2035?
  • What are the drivers for capital investment in the gas supply and distribution industry?
  • How do environmental legislation and regulations affect the industry?
  • What are the key issues facing the gas supply sector?

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Table of contents

  1. Executive Summary

      • The market
        • UK gas demand in long-term decline
          • Demand for gas from the domestic sector strongly influenced by changing weather patterns
            • Figure 1: Gas consumption by key end use sectors, 2010-14
          • Total capital expenditure across the gas transmission and distribution network picks up in 2014/15
            • Figure 2: Total gas transmission and distribution capital expenditure, 2010/11-2014/15
          • Gas network operators report lower capital spending than the allowances set by Ofgem in the first two years of RIIO-GD1
            • Market factors
              • UK increasingly dependent on natural gas imports
                • Figure 3: UK Gas Supply, 2011-15
              • Iron Mains Replacement Programme (IMRP) drives replacement expenditure by gas distribution network operators
                • Plummeting wholesale gas prices prompt major energy suppliers to cut prices
                  • 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...
                          • ... But independent energy suppliers are rapidly gaining market share
                            • What we think
                            • Key Insights

                                • How does Ofgem’s new regulatory framework, the RIIO model, impact distribution network operators’ approach to infrastructure management and investment?
                                  • What are the key challenges faced by the UK’s gas network operators? How are companies innovating to address these challenges?
                                    • What are the key drivers for replacement expenditure by gas distribution network operators?
                                      • 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
                                                    • Ofgem regulates gas network operators via price controls
                                                      • Customers
                                                        • Suppliers
                                                        • UK Economy

                                                          • Overview
                                                            • Figure 4: UK GDP quarterly development, 2003-15
                                                            • Figure 5: UK GDP in economic downturns and recoveries since 1979
                                                          • Inflation
                                                            • Interest rates
                                                              • Consumer spending
                                                                • Business investment
                                                                  • Figure 6: UK GFCF 2003-15
                                                              • 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 7: Average wholesale gas prices, 2002-15
                                                                            • Figure 8: Average wholesale gas prices, 2002-15
                                                                          • Environmental and Legislative Factors
                                                                          • UK Gas Demand and Supply

                                                                            • Key points
                                                                              • Overview
                                                                                • UK gas demand in decline
                                                                                  • Figure 9: Segmentation of industrial gas consumption, by end use industries, UK, 2010-14
                                                                                  • Figure 10: Segmentation of gas consumption, by non-industrial sectors, UK, 201014
                                                                                  • Figure 11: Segmentation of gas consumption, by non-industrial sectors, 2014
                                                                                • Power generation
                                                                                  • Figure 12: Gas supplied for electricity generation, UK, 2011-15
                                                                                  • Figure 13: Gas supplied for electricity generation, UK, 2011-15
                                                                                • Interruptible
                                                                                  • Industrial
                                                                                    • Figure 14: Gas supplied to the industrial sector, UK, 2011-15
                                                                                    • Figure 15: Gas supplied to the industrial sector, UK, 2011-15
                                                                                  • Commercial
                                                                                    • Figure 16: Gas supplied to the UK commercial sector, 2010-14
                                                                                    • Figure 17: Gas supplied to the commercial sector, UK, 2010-14
                                                                                  • Domestic
                                                                                    • Figure 18: Analysis of the development of gas supplied to the UK domestic sector, 2011-15
                                                                                    • Figure 19: Gas supplied to the UK domestic sector, 2011-15
                                                                                    • Figure 20: UK installed base of central heating systems, by type of fuel, 1970-2012
                                                                                  • Regional demand
                                                                                    • Figure 21: Gas sales and customers by region, Great Britain, 2014
                                                                                  • Northern Ireland gas market
                                                                                    • Gas supply
                                                                                        • Figure 22: Total gas supply, UK, 2011-15
                                                                                        • Figure 23: Development of the UK gas supply, 2011-15
                                                                                    • Gas Transmission & Distribution Capital Expenditure

                                                                                      • Key points
                                                                                        • Capital expenditure
                                                                                          • The Market 2011-15
                                                                                            • Figure 24: Total gas transmission and distribution capital expenditure, 2010/11-2014/15
                                                                                            • Figure 25: Total gas transmission capital expenditure, 2010/11-14/15
                                                                                            • Figure 26: Total gas distribution capital expenditure, 2010/11-2014/15
                                                                                            • Figure 27: Total gas transmission and distribution capital expenditure, 2010/112014/15
                                                                                          • Replacement expenditure (Repex)
                                                                                              • Figure 28: Length of gas mains replaced, by distribution network operator, 2009-13
                                                                                              • Figure 29: Cumulative replacement expenditure during GDPRC1 2008-13, by GDN and type
                                                                                            • Individual companies
                                                                                              • Figure 30: Gas transmission and distribution capital expenditure by National Grid Gas, 20010/11-2014/15
                                                                                              • Figure 31: Gas Distribution Capital Expenditure by Northern Gas Networks, 2010/11-2014/15
                                                                                              • Figure 32: Gas Distribution Capital Expenditure by Scottish Gas Networks, 2010/11-2014/15
                                                                                              • Figure 33: Gas distribution capital expenditure by Southern Gas Networks, 2010/11-2014/15
                                                                                              • Figure 34: Gas Distribution Capital Expenditure by Wales and West Utilities, 2010/11-2014/15
                                                                                          • Forecast Capital Expenditure

                                                                                            • Key points
                                                                                              • Overview
                                                                                                  • Figure 35: 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 36: Capital Expenditure Plans by National Grid Gas Under RIIO-T1, by Category, 2014-2021
                                                                                                      • Figure 37: Annual capital expenditure plans by National Grid Gas Under RIIO-T1, by Category, 2014-2021
                                                                                                    • Distribution network
                                                                                                      • Figure 38: Controllable Cost Allowances for Gas Distribution Companies Under (RIIOGD1), 2014-2021
                                                                                                      • Figure 39: Annual capex plans under RIIO-GD1, by GDN, 2014-2021
                                                                                                      • Figure 40: Annual repex plans under RIIO-GD1, by GDN, 2014-2021
                                                                                                      • Figure 41: Forecast total capex and repex during RIIOGD1, 2013/142020/21
                                                                                                    • Individual companies
                                                                                                      • Figure 42: Northern Gas Networks Capex & Repex, 2014- 15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 43: Northern Gas Networks Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 44: Scotland Gas Networks Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 45: Scotland Gas Networks Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 46: Southern Gas Networks Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 47: Southern Gas Networks Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 48: WWU Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 49: WWU Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 50: NGG East of England Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 51: NGG East of England Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 52: NGG London Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 53: NGG London Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 54: NGG North West Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 55: NGG North West Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 56: NGG West Midlands Capex & Repex, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                      • Figure 57: NGG West Midlands Capex & Repex Workload, 2014-15 (Actual) and 2016-21 (Planned)
                                                                                                  • Structure of the Gas Distribution Industry

                                                                                                    • Key points
                                                                                                      • Industry structure
                                                                                                        • Industry development
                                                                                                            • Figure 58: Structure of the Distribution Network Operators, as of February 2016
                                                                                                          • Competition in Network Connections
                                                                                                          • National Grid Gas

                                                                                                              • National Grid looking to sell its UK gas distribution businesses
                                                                                                                • National Grid gas’ innovation strategy
                                                                                                                    • Figure 59: Financial analysis of National Grid Gas, 2011-15
                                                                                                                • Northern Gas Networks

                                                                                                                    • NGN’ spending plans
                                                                                                                      • Innovation
                                                                                                                          • Figure 60: Financial analysis of Northern Gas Networks, 2010-15
                                                                                                                      • Scotland Gas Networks

                                                                                                                          • Innovation
                                                                                                                              • Figure 61: Financial analysis of Scotland Gas Networks, 2011-15
                                                                                                                          • Southern Gas Networks

                                                                                                                                • Figure 62: Financial analysis of Southern Gas Networks, 2011-15
                                                                                                                            • Wales and West Utilities

                                                                                                                                • Figure 63: Financial analysis of Wales & West Utilities, 2011-14
                                                                                                                            • Gas Supply Industry

                                                                                                                              • Key points
                                                                                                                                • Recent retail market and industry developments
                                                                                                                                  • Reforms promoting increased competition and supplier switching in retail energy market
                                                                                                                                    • ‘Big six’ suppliers come under fire for charging high prices in 2013
                                                                                                                                      • Suppliers have announced numerous gas price cuts since 2014 , reflecting falling wholesale costs, cuts to green levies, and increased competition
                                                                                                                                        • Breakdown of average gas and electricity bill
                                                                                                                                          • Figure 64: Breakdown of average domestic electricity& gas household bill, 2014
                                                                                                                                          • Figure 65: Breakdown of average domestic gas bill, 2014
                                                                                                                                        • Smaller suppliers gaining market share
                                                                                                                                            • Figure 66: Domestic gas supply market shares in Great Britain, by company 20102015
                                                                                                                                          • Lower prices, customer dissatisfaction with the ‘big six’, and differentiation strategies are driving the growth of small suppliers
                                                                                                                                            • Poor customer service and complaints handling remains an industry-wide issue
                                                                                                                                              • CMA Energy Market Investigation
                                                                                                                                                • Smart Meter Roll-out programme
                                                                                                                                                  • Switching rates in the SME sector also set to increase
                                                                                                                                                  • Centrica/British Gas Trading

                                                                                                                                                      • Company strategy and outlook
                                                                                                                                                          • Figure 67: Financial analysis of Centrica, 2010-14
                                                                                                                                                          • Figure 68: Centrica revenue segmental analysis, 2014
                                                                                                                                                        • Focus on innovative Connected Homes Products
                                                                                                                                                            • Figure 69: Financial analysis of British Gas Trading, 2010-14
                                                                                                                                                        • EDF Energy

                                                                                                                                                              • Figure 70: Financial analysis of EDF Energy, 2010-14
                                                                                                                                                              • Figure 71: EDF Energy revenue segmental analysis, 2014
                                                                                                                                                          • NPower

                                                                                                                                                              • Company strategy and outlook
                                                                                                                                                                  • Figure 72: Financial analysis of Npower, 2010-14
                                                                                                                                                                  • Figure 73: RWE - UK revenue segmental analysis, 2014
                                                                                                                                                              • E.ON Energy

                                                                                                                                                                • Ecotricity Group

                                                                                                                                                                    • Company strategy
                                                                                                                                                                      • Figure 74: Financial analysis of Ecotricity Group, 2011-15
                                                                                                                                                                    • Company strategy
                                                                                                                                                                        • Figure 75: Financial analysis of E.ON Energy Solutions, 2010-14
                                                                                                                                                                        • Figure 76: E.ON revenue segmental analysis, 2014
                                                                                                                                                                    • First Utility

                                                                                                                                                                        • Company strategy and outlook
                                                                                                                                                                          • Figure 77: Financial analysis of First Utility, 2010-14
                                                                                                                                                                      • Future Gas Demand

                                                                                                                                                                        • Key points
                                                                                                                                                                          • The market
                                                                                                                                                                              • Figure 78: Forecast UK gas demand, 2016-35
                                                                                                                                                                              • Figure 79: Forecast UK gas demand, 2016-35
                                                                                                                                                                              • Figure 80: Forecast gas demand, by sector, 2016-35
                                                                                                                                                                              • Figure 81: Forecast UK gas demand by sector under “slow progression” scenario, 2016-35
                                                                                                                                                                              • Figure 82: Forecast UK gas demand by sector under “gone green” scenario, 2016-35
                                                                                                                                                                              • Figure 83: Forecast UK gas demand by sector under “no progression” scenario, 2016-35
                                                                                                                                                                              • Figure 84: Forecast UK gas demand by sector under “consumer power” scenario, 2016-35
                                                                                                                                                                            • Domestic demand
                                                                                                                                                                              • Industrial/commercial demand
                                                                                                                                                                                • Power generation demand
                                                                                                                                                                                    • Figure 85: Forecast power generation installed capacity under “slow progression” scenario, by source, 2015-36
                                                                                                                                                                                    • Figure 86: Forecast power generation installed capacity under “gone green” scenario, by source, 2015-36
                                                                                                                                                                                    • Figure 87: Forecast power generation installed capacity under “no progression” scenario, by source, 2015-36
                                                                                                                                                                                    • Figure 88: Forecast power generation installed capacity under “consumer power” scenario, by source, 2015-36
                                                                                                                                                                                  • Imports
                                                                                                                                                                                      • Figure 89: Existing UK gas import infrastructure, as of November 2015
                                                                                                                                                                                      • Figure 90: Proposed UK import projects, as of November 2015
                                                                                                                                                                                    • Exports
                                                                                                                                                                                    • Good Energy Group

                                                                                                                                                                                        • Company strategy
                                                                                                                                                                                          • Figure 91: Financial analysis of Good Energy Group, 2010-14
                                                                                                                                                                                          • Figure 92: Turnover analysis of Good Energy Group, by segment, 2012-14
                                                                                                                                                                                      • ScottishPower Energy Retail

                                                                                                                                                                                          • Company strategy & outlook
                                                                                                                                                                                            • Figure 93: Financial analysis of ScottishPower Energy Retail, 2010-14
                                                                                                                                                                                            • Figure 94: ScottishPower revenue segmental analysis, 2014
                                                                                                                                                                                        • SSE

                                                                                                                                                                                            • Company strategy and outlook
                                                                                                                                                                                              • Figure 95: Financial analysis of SSE, 2011-15
                                                                                                                                                                                              • Figure 96: SSE revenue segmental analysis, 2015
                                                                                                                                                                                          • Further Sources & Contacts

                                                                                                                                                                                            • Trade associations & regulatory bodies
                                                                                                                                                                                              • Trade exhibitions
                                                                                                                                                                                                • Trade magazines

                                                                                                                                                                                                Companies Covered

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

                                                                                                                                                                                                Gas Supply and Distribution - UK - March 2016

                                                                                                                                                                                                US $1,288.43 (Excl.Tax)