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Gas Supply and Distribution - UK - March 2017

“Ofgem has introduced a new regulatory framework, known as the RIIO model, for the current eight-year price controls for gas transmission and distribution networks, which run from April 2013 to March 2021. Under the new framework, the revenue earned by network operators is strongly linked to incentives, innovation and outputs. The changes mean that companies need to adopt a more long-term approach to infrastructure investment decisions, with increased focus on active asset management over traditional network investment. There is also an increased focus on innovation and new technologies that facilitate the efficient operation of the infrastructure network and provide operational cost savings.”

Claudia Preedy - B2B Analyst

This report looks at the following areas:

  • 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 recommendations in the CMA's final report following the energy market inquiry?

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Table of contents

  1. Executive Summary

      • The market
        • Increased demand for electricity generation drives natural gas demand in 2016, reversing recent downward trend
          • Demand for gas from the domestic sector strongly influenced by changing weather patterns
            • Figure 1: Gas consumption by key end use sectors, 2012-16
          • Capital expenditure in gas transmission and distribution industry up by 5% in 2015/16
            • Figure 2: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
          • National Grid Gas Transmission forecasts total capex to more than double between 2013/14 and 2017/18
            • Market factors
              • UK increasingly dependent on natural gas imports
                • Figure 3: UK Gas Supply, 2012-16
              • Iron Mains Replacement Programme (IMRP) drives replacement expenditure by gas distribution network operators
                • Rising wholesale costs prompt a number of suppliers to hike prices in early 2017, following price cuts in the previous year
                  • 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 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 recommendations in the CMA’s final report following the energy market inquiry?
                                    • Introduction

                                        • Definitions
                                          • Methodology
                                            • Abbreviations
                                            • Market Positioning

                                              • Key points
                                                • Overview
                                                  • Roles of distribution networks
                                                    • Ofgem regulates gas network operators via price controls
                                                      • Customers
                                                        • Suppliers
                                                        • UK Economy

                                                          • Overview
                                                            • Figure 4: UK GDP quarterly development, 2003-16
                                                            • Figure 5: UK GDP in economic downturns and recoveries since 1979
                                                          • Inflation
                                                            • Interest rates
                                                              • House prices
                                                                • Figure 6: UK house price changes, 2004-16
                                                              • Consumer spending
                                                                • Manufacturing
                                                                  • Figure 7: UK manufacturing, 2014-16
                                                                • Business investment
                                                                  • Figure 8: UK GFCF 2003-16
                                                                • Imports
                                                                  • Exports
                                                                  • 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 9: Average wholesale gas prices, 2002-16
                                                                                • Figure 10: Average wholesale gas prices, 2002-16
                                                                              • Environmental and legislative factors
                                                                                • Climate Change Programme (including Climate Change Levy, Agreement and efficiency measures)
                                                                                  • Emissions Trading Scheme
                                                                                    • Carbon Plan
                                                                                      • Combined Heat and Power
                                                                                        • EU Renewables Directives
                                                                                          • Climate Change Act 2008
                                                                                            • Renewables Obligation (RO)
                                                                                              • Feed-In 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)
                                                                                                        • Reforms to promote increased competition in retail energy market
                                                                                                          • CMA energy market investigation
                                                                                                          • UK Gas Demand and Supply

                                                                                                            • Key points
                                                                                                              • Overview
                                                                                                                • UK gas demand in decline
                                                                                                                  • Figure 11: Segmentation of industrial gas consumption, by end use industries, UK, 2011-15
                                                                                                                  • Figure 12: Segmentation of gas consumption, by non-industrial sectors, UK, 2011-15
                                                                                                                  • Figure 13: Segmentation of gas consumption, by non-industrial sectors, 2015
                                                                                                                • Power generation
                                                                                                                  • Figure 14: Gas supplied for electricity generation, UK, 2012-16
                                                                                                                  • Figure 15: Gas supplied for electricity generation, UK, 2012-16
                                                                                                                • Interruptible
                                                                                                                  • Industrial
                                                                                                                    • Figure 16: Gas supplied to the industrial sector, UK, 2012-16
                                                                                                                    • Figure 17: Gas supplied to the industrial sector, UK, 2012-16
                                                                                                                  • Commercial
                                                                                                                    • Figure 18: Gas supplied to the UK commercial sector, 2011-15
                                                                                                                    • Figure 19: Gas supplied to the commercial sector, UK, 2011-15
                                                                                                                  • Domestic
                                                                                                                    • Figure 20: Analysis of the development of gas supplied to the UK domestic sector, 2012-16
                                                                                                                    • Figure 21: Gas supplied to the UK domestic sector, 2012-16
                                                                                                                    • Figure 22: UK installed base of central heating systems, by type of fuel, 1970-14
                                                                                                                  • Regional demand
                                                                                                                    • Figure 23: Gas sales and customers by region, Great Britain, 2015
                                                                                                                  • Northern Ireland gas market
                                                                                                                    • Gas supply
                                                                                                                        • Figure 24: Total gas supply, UK, 2012-16
                                                                                                                        • Figure 25: Development of the UK gas supply, 2012-16
                                                                                                                    • Gas Transmission and Distribution Capital Expenditure

                                                                                                                      • Key points
                                                                                                                        • Capital expenditure
                                                                                                                          • The market 2012-16
                                                                                                                            • Figure 26: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
                                                                                                                            • Figure 27: Total gas transmission capital expenditure, 2011/12-15/16
                                                                                                                            • Figure 28: Total gas distribution capital expenditure, 2011/12-2015/16
                                                                                                                            • Figure 29: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
                                                                                                                          • Replacement expenditure (Repex)
                                                                                                                              • Figure 30: Length of iron gas mains replaced, by distribution network operator, 2011-16
                                                                                                                            • Capital expenditure by individual companies
                                                                                                                              • National Grid Gas
                                                                                                                                • Figure 31: Gas transmission and distribution capital expenditure by National Grid Gas, 20011/12-2015/16
                                                                                                                              • Northern Gas Networks
                                                                                                                                • Figure 32: Gas Distribution Capital Expenditure by Northern Gas Networks, 2011/12-2015/16
                                                                                                                              • Scottish Gas Networks
                                                                                                                                • Figure 33: Gas Distribution Capital Expenditure by Scottish Gas Networks, 2011/12-2015/16
                                                                                                                              • Southern Gas Networks
                                                                                                                                • Figure 34: Gas distribution capital expenditure by Southern Gas Networks, 2011/12-2015/16
                                                                                                                              • Wales and West Utilities
                                                                                                                                • Figure 35: Gas Distribution Capital Expenditure by Wales and West Utilities, 2011/12-2015/16
                                                                                                                            • Forecast Capital Expenditure

                                                                                                                              • Key points
                                                                                                                                • Overview
                                                                                                                                    • Figure 36: 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 37: Capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-21
                                                                                                                                        • Figure 38: Annual capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-2021
                                                                                                                                      • Distribution network
                                                                                                                                        • Figure 39: Controllable cost allowances for gas distribution companies under (RIIO-GD1), 2014-21
                                                                                                                                        • Figure 40: Annual capex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                        • Figure 41: Annual repex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                        • Figure 42: Forecast total capex and repex during RIIO-GD1, 2013/14-2020/21
                                                                                                                                      • Individual companies
                                                                                                                                        • Northern Gas Networks
                                                                                                                                          • Figure 43: Northern Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 44: Northern Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • Scotland Gas Networks
                                                                                                                                          • Figure 45: Scotland Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 46: Scotland Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • Southern Gas Networks
                                                                                                                                          • Figure 47: Southern Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 48: Southern Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • Wales and West Utilities (WWU)
                                                                                                                                          • Figure 49: WWU capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 50: WWU capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • NGG East of England
                                                                                                                                          • Figure 51: NGG East of England capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 52: NGG East of England capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • NGG London
                                                                                                                                          • Figure 53: NGG London capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 54: NGG London capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • NGG North West
                                                                                                                                          • Figure 55: NGG North West capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 56: NGG North West capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                        • NGG West Midlands
                                                                                                                                          • Figure 57: NGG West Midlands capex & repex, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                          • Figure 58: NGG West Midlands capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
                                                                                                                                      • Structure of the Gas Distribution Industry

                                                                                                                                        • Key points
                                                                                                                                          • Development and structure of the gas industry
                                                                                                                                            • Industry structure
                                                                                                                                              • Industry development
                                                                                                                                                • National Grid Gas sells majority stake in its four UK distribution networks
                                                                                                                                                    • Figure 59: Structure of the Distribution Network Operators, as of February 2017
                                                                                                                                                  • Competition in network connections
                                                                                                                                                  • National Grid Gas

                                                                                                                                                      • National Grid sells its UK gas distribution businesses
                                                                                                                                                        • National Grid Gas’ Innovation Strategy
                                                                                                                                                            • Figure 60: Financial analysis of National Grid Gas, 2012-16
                                                                                                                                                        • Northern Gas Networks

                                                                                                                                                            • NGN’ Spending Plans
                                                                                                                                                              • Innovation
                                                                                                                                                                  • Figure 61: Financial analysis of Northern Gas Networks, 2011-16
                                                                                                                                                              • Scotland Gas Networks

                                                                                                                                                                  • Innovation
                                                                                                                                                                      • Figure 62: Financial analysis of Scotland Gas Networks, 2012-16
                                                                                                                                                                  • Southern Gas Networks

                                                                                                                                                                        • Figure 63: Financial analysis of Southern Gas Networks, 2012-16
                                                                                                                                                                    • Wales and West Utilities

                                                                                                                                                                        • Figure 64: Financial analysis of Wales & West Utilities, 2012-16
                                                                                                                                                                    • Gas Supply Industry

                                                                                                                                                                      • Key points
                                                                                                                                                                        • Recent retail market and industry developments
                                                                                                                                                                          • Ofgem implemented market reforms in 2014 to promote increased competition and supplier switching
                                                                                                                                                                            • Further market reforms on the way following CMA Energy Market Investigation
                                                                                                                                                                              • Cheaper tariffs available due to falling wholesale costs, cuts to green levies and increased competition
                                                                                                                                                                                • ...but a number of suppliers hike prices in early 2017, citing rising wholesale costs and the cost of delivering government policies
                                                                                                                                                                                  • Suppliers face criticism from government amid latest price hikes
                                                                                                                                                                                    • Breakdown of average gas and electricity bill
                                                                                                                                                                                      • Figure 65: Breakdown of average large supplier dual fuel household bill, 2015
                                                                                                                                                                                      • Figure 66: Breakdown of average domestic electricity bill, 2015
                                                                                                                                                                                      • Figure 67: Breakdown of average domestic gas bill, 2015
                                                                                                                                                                                    • Cheap fixed tariffs have become focal point of competition...
                                                                                                                                                                                      • A considerable proportion of households remain on more expensive standard variable tariff, but switching rates are on the up
                                                                                                                                                                                        • Figure 68: Number of supplier switches in the domestic gas and electricity markets and share of small suppliers, Great Britain, Q1 2011 - Q4 2016
                                                                                                                                                                                        • Figure 69: Number of supplier switches in the domestic gas and electricity markets, Great Britain, 2013 – 16
                                                                                                                                                                                      • Independent suppliers are rapidly gaining market share
                                                                                                                                                                                          • Figure 70: Domestic gas supply market shares in Great Britain, by company 2012-16
                                                                                                                                                                                        • Lower prices and differentiation strategies drive growth of independent suppliers
                                                                                                                                                                                          • Future rise in wholesale prices could put smaller suppliers at risk
                                                                                                                                                                                            • Poor customer service and complaints handling is an industry-wide issue
                                                                                                                                                                                              • Smart Meter Roll-out programme
                                                                                                                                                                                                • Switching rates in the SME sector also set to increase
                                                                                                                                                                                                • Centrica/British Gas Trading

                                                                                                                                                                                                    • Recent acquisitions and disposals
                                                                                                                                                                                                      • Company strategy
                                                                                                                                                                                                          • Figure 71: Financial analysis of Centrica, 2011-15
                                                                                                                                                                                                          • Figure 72: Centrica revenue segmental analysis, 2016
                                                                                                                                                                                                        • British Gas freezes standard energy tariffs until August 2017
                                                                                                                                                                                                          • Focus on innovative Connected Homes Products
                                                                                                                                                                                                            • Company review and outlook
                                                                                                                                                                                                                • Figure 73: Financial analysis of British Gas Trading, 2011-15
                                                                                                                                                                                                            • EDF Energy

                                                                                                                                                                                                                • Smart metering programme
                                                                                                                                                                                                                  • Recent price cuts and hikes
                                                                                                                                                                                                                    • Intense competition sees EDF Energy lose more customers in 2016
                                                                                                                                                                                                                      • Figure 74: Financial analysis of EDF Energy, 2011-15
                                                                                                                                                                                                                      • Figure 75: EDF Energy revenue segmental analysis, 2015
                                                                                                                                                                                                                  • RWE Npower

                                                                                                                                                                                                                      • Price cuts announced in early 2016...
                                                                                                                                                                                                                        • ...But Npower introduces strong price rises in March 2017
                                                                                                                                                                                                                          • Company strategy and outlook
                                                                                                                                                                                                                              • Figure 76: Financial analysis of Npower, 2011-15
                                                                                                                                                                                                                              • Figure 77: RWE - UK revenue segmental analysis, 201 5
                                                                                                                                                                                                                          • E.ON Energy

                                                                                                                                                                                                                              • E.ON cuts gas price in early 2016....
                                                                                                                                                                                                                                • .. But announces a price hike in March 2017, the first in more than three years
                                                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                                                    • Figure 78: Financial analysis of E.ON Energy Solutions, 2011-15
                                                                                                                                                                                                                                    • Figure 79: E.ON revenue segmental analysis, 2015
                                                                                                                                                                                                                                • ScottishPower Energy Retail

                                                                                                                                                                                                                                    • Gas prices cut in early 2016, but dual tariff raised in early 2017
                                                                                                                                                                                                                                      • Company strategy & outlook
                                                                                                                                                                                                                                          • Figure 80: Financial analysis of ScottishPower Energy Retail, 2011-15
                                                                                                                                                                                                                                          • Figure 81: ScottishPower revenue segmental analysis, 2015
                                                                                                                                                                                                                                      • SSE

                                                                                                                                                                                                                                          • Recent reductions in gas prices for SSE customers
                                                                                                                                                                                                                                            • But SSE hikes electricity prices from April 2017
                                                                                                                                                                                                                                              • Company strategy and outlook
                                                                                                                                                                                                                                                • Figure 82: Financial analysis of SSE, 2012-16
                                                                                                                                                                                                                                                • Figure 83: SSE revenue segmental analysis, 2016
                                                                                                                                                                                                                                            • Ecotricity Group

                                                                                                                                                                                                                                                • Ecotricity raises energy prices towards the end of 2016
                                                                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                                                                    • Figure 84: Financial analysis of Ecotricity Group, 2012-16
                                                                                                                                                                                                                                                • First Utility

                                                                                                                                                                                                                                                    • Company strategy and outlook
                                                                                                                                                                                                                                                      • Figure 85: Financial analysis of First Utility, 2011-15
                                                                                                                                                                                                                                                  • Good Energy Group

                                                                                                                                                                                                                                                      • Company strategy
                                                                                                                                                                                                                                                          • Figure 86: Financial analysis of Good Energy Group, 2011-15
                                                                                                                                                                                                                                                          • Figure 87: Turnover analysis of Good Energy Group, by segment, 2012-15
                                                                                                                                                                                                                                                      • Future Gas Demand

                                                                                                                                                                                                                                                        • Key points
                                                                                                                                                                                                                                                          • The market
                                                                                                                                                                                                                                                            • Consumer Power scenario:
                                                                                                                                                                                                                                                              • No Progression scenario:
                                                                                                                                                                                                                                                                • Gone Green scenario:
                                                                                                                                                                                                                                                                  • Slow Progression scenario:
                                                                                                                                                                                                                                                                      • Figure 88: Forecast UK gas demand, 2016-40
                                                                                                                                                                                                                                                                      • Figure 89: Forecast UK gas demand, 2016-40
                                                                                                                                                                                                                                                                      • Figure 90: Forecast gas demand, by sector, 2016-40
                                                                                                                                                                                                                                                                      • Figure 91: Forecast UK gas demand by sector under “slow progression” scenario, 2016-35
                                                                                                                                                                                                                                                                      • Figure 92: Forecast UK gas demand by sector under “gone green” scenario, 2016-35
                                                                                                                                                                                                                                                                      • Figure 93: Forecast UK gas demand by sector under “no progression” scenario, 2016-35
                                                                                                                                                                                                                                                                      • Figure 94: Forecast UK gas demand by sector under “consumer power” scenario, 2016-35
                                                                                                                                                                                                                                                                    • Domestic demand
                                                                                                                                                                                                                                                                      • Home insulation
                                                                                                                                                                                                                                                                        • Smart meters programme
                                                                                                                                                                                                                                                                          • Increased uptake of smart thermostats
                                                                                                                                                                                                                                                                            • Heat pumps
                                                                                                                                                                                                                                                                              • Industrial/commercial demand
                                                                                                                                                                                                                                                                                • Power generation demand
                                                                                                                                                                                                                                                                                    • Figure 95: Forecast power generation installed capacity under “slow progression” scenario, by source, 2016-40
                                                                                                                                                                                                                                                                                    • Figure 96: Forecast power generation installed capacity under “gone green” scenario, by source, 2016-40
                                                                                                                                                                                                                                                                                    • Figure 97: Forecast power generation installed capacity under “no progression” scenario, by source, 2016-40
                                                                                                                                                                                                                                                                                    • Figure 98: Forecast power generation installed capacity under “consumer power” scenario, by source, 2016-40
                                                                                                                                                                                                                                                                                  • Imports
                                                                                                                                                                                                                                                                                      • Figure 99: Existing UK gas import infrastructure, as of November 2016
                                                                                                                                                                                                                                                                                      • Figure 100: Proposed UK import projects, as of November 2016
                                                                                                                                                                                                                                                                                    • Exports
                                                                                                                                                                                                                                                                                    • Further Sources & Contacts

                                                                                                                                                                                                                                                                                      • Trade associations & 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
                                                                                                                                                                                                                                                                                                    • edie2016
                                                                                                                                                                                                                                                                                                      • Offshore Europe 2017
                                                                                                                                                                                                                                                                                                        • 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 2017

                                                                                                                                                                                                                                                                                                            US $1,236.29 (Excl.Tax)