The acquisition of Seeboard by Electricité de France has further changed the landscape of the UK electricity supply market. With the exception of TXU the supply market is now largely controlled by European utility groups and dominant amongst these are the French and Germans. The acquisition also increases the level of consolidation in the UK market at a time when competition growth appears to be reaching maturity and electricity prices are falling to potentially unsustainable levels.
The change in supply business ownership since privatisation in 1990 provides an interesting insight into an evolving competitive market. At privatisation the UK market was viewed by some as a test market and as such was of primary interest to cash rich US utilities that sought a hands-on appreciation of managing a competitive supply business. European markets, with the exception of Scandinavia, lagged behind the UK in terms of supply competition, which limited their interest. As such the UK market has moved through three stages of ownership: UK owned supply businesses at privatisation; a progressive investment by US utilities during the mid-nineties; and more recently the divestment by US utilities being replaced by investment from European utility groups as EU market deregulation increases.
Against this scenario one issue to be addressed is that of the role of UK-owned utilities in the UK market. Much has been written on the value of national utility champions and the absence of any UK utilities within such a group. With Seeboard passing into French ownership the UK is left with just three large UK-owned utilities: Centrica; Scottish Power; and Scottish and Southern Energy. Of these three utilities Scottish Power is the most vulnerable to acquisition and the smart money appears to be on PowerGen, itself recently acquired by Germany's E.On, being successful, particularly as PowerGen was an active bidder for Seeboard.
An alternative scenario to PowerGen acquiring Scottish Power would be a merger between the two Scottish utility groups, providing the UK with a potential 'national champion'. Indeed this is probably the last major acquisition left in the UK market, which is now close to consolidating to its minimum number of supply companies.
However it is becoming evident that the dynamics of market consolidation are outstripping those of competition. While consolidation is increasing, competition is not. Of potentially most concern is that the full value of competition has not been realised before the dynamics of consolidation have taken hold. The regulator may therefore be faced with a series of delicate balancing acts to ensure not only synergistic benefits between consolidation and competition, but also that electricity prices can sustain investment in new generation to meet future demand growth.
Towards increased energy prices
Gas is increasingly pivotal to the UK's energy requirements with 50 per cent of electricity generation forecast to be gas-fired by 2010. But domestic gas production will be unable to meet this growing demand, as by 2016 the main gas fields at Britannia and Morgan will be exhausted if existing production levels are maintained. With little else in the way of new gas production expected to come on stream the UK is facing increased pressure to source imports to meet its growing demand.
It was therefore of little surprise that two gas companies - Centrica and Exxon-Mobil - have announced major new supply agreements. Centrica has entered into a long-term gas supply agreement with Gasunie while Exxon-Mobil has plans to import between 8 and 10 bcm of liquefied natural gas (LNG) from Qatar and will build a re-gasification plant at Fawley to convert the LNG into natural gas. Other UK companies are expected to follow suit with the majority of natural gas and LNG imports likely to be sourced from the gas rich regions of the Middle East and Russia.
Two developments are likely from increased imports. First, gas prices will likely increase, which will impact on electricity prices by virtue of the strong convergence between the two. And, more importantly, with gas being sourced from the Middle East and Russia the gas price will be linked to oil prices. The importance of this is that UK gas has been de-linked from oil prices for the past few years as gas-on-gas competition has evolved as the primary determinant of gas pricing. Re-linking gas prices to the oil market will increase the gas market's exposure to uncertainty in the oil markets and could reduce the impact of UK market fundamentals on pricing which is the basis of gas-on-gas competition.
Although the UK government conceded in its energy policy review that the country will become more dependent on gas imports the potential scale and timing of these requirements was not perhaps fully apparent at the time. An over reliance on new non-domestic sources of gas could markedly increase the price not just of gas but of energy in general and, as a consequence, could adversely impact on the business economy and consumer lifestyles.
Lost opportunities
At next month's Earth Summit in Johannesburg some real progress towards ratifying the Kyoto Protocol appears achievable. The more proactive nations, such as those in the EU, believe ratification can be achieved by end of the year.
While the US remains steadfast in its opposition to Kyoto on economic grounds there is a growing realisation within the US that its refusal to ratify the Protocol could be more economically disadvantageous than ratifying. According to Deutsche Bank forecasts the global emissions market will be valued around $100bn by 2010. But only signatories to the Protocol will be able to engage in the Kyoto Protocol emission trading programmes, leaving the US on the sidelines.
In making its vociferous arguments against the Protocol the US administration believed it could sway other nations towards its view. In this it has been unsuccessful and the nation that introduced the concept of emissions trading may now be denied the opportunity to participate in the world's largest emission trading scheme.
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