The UK Energy Experience

The following sections are included:

• Introduction

• The experience of gas privatization

• The experience of electricity privatization

• The distinctive features of the privatized English ESI

• Investment and entry

• Transmission

• Distribution

• Supply

• Assessment on electricity

• Conclusions

• REFERENCES

As Secretary of State for Trade and Industry, Mr Heseltine announced in December 1993 that the domestic or household gas market would be opened to competition — partially from April 1996 and fully from April 1998 to coincide with full competition in the electricity market. The Government has so far regarded the advantages of competition as self-evident. This paper attempts to assess the likely benefits, costs and risks of this policy.

The emphasis of regulation in UK utilities has moved from controlling final markets to encouraging competition by regulating the price which competitors pay for access to the (monopoly) network. Much attention has been paid to the optimal level of that access price, and the appropriate institutional instruments to achieve it. This paper examines one industry, gas, and shows how the monopoly incumbent has changed both the level and structure of its access price in response to changes in its regulatory and competitive environment.

In April 1996 domestic customers in the south-west of England will, for the first time, be able to choose from competing gas suppliers. By 1998 all customers will be able to "shop-around" for gas. What are the prospects for customers benefiting from this liberalisation of the gas market? One view is that competition will produce little benefit for domestic customers. Even if new gas suppliers could find cost savings above the not insignificant costs of establishing and operating a major new commercial enterprise, price reductions to domestic customers are unlikely to be large since suppliers' costs in the domestic sector only make up a relatively small component of total costs. And because competition could expose some customers as more attractive than others, there is the prospect of losers as well as winners.

In this paper, however, we take a broader view of the impact of competition on all elements of the gas chain. We consider the prospect of lower gas prices for domestic customers being achieved through lower gas purchase costs for suppliers, compared to those faced by British Gas in recent years. Customers could also 'win' from the significant degree of innovation we anticipate from the new competing suppliers. Such innovation may also force suppliers to reassess those customers previously thought to be unattractive.

This paper examines the performance of the UK petroleum fiscal system introduced in 1975 from the viewpoint of a mechanism designed to collect economic rents. The many changes in the period to the early 1980's made the system less well-targeted in economic rents and could have caused investment disincentives. The subsequent changes to a more profit-related basis generally produced an economically more efficient system. The number of changes were excessive and were motivated by short term revenue considerations. Conceptually PRT is a tolerably appropriate instrument to collect economic rents but the specific one introduced in the UK has unnecessary complexities. The safeguard could have been omitted. The package of changes introduced in 1983 led to exploration effectively being subsidised. Some restriction crossfield exploration relief, say to a contract area basis would have mitigated the problem. The removal of PRT on new fields in 1993 while increasing UK competitiveness also increase political risk. The multi-tier system may distort investment decisions. The decision to levy PRT on tariff income was probably justifiable in the early 1980's but with increased competition among asset owners and the non-level playing field its continuation for new contracts is open to question.

Using an irreversible investment model of oil development, this paper illustrates how a fiscal regime can be in that the decision to develop is not affect by tax and in recouping economic rents where cumulated operating profits are taxed if and only if they surpass an appropriate level of tax deductible allowances. For a simplified version of the Petroleum Revenue Tax (PRT) applied to the United Kingdom Continental Shelf until 1993, numerical calculations suggest that PRT was both neutral and relatively efficient. Why then was it substantially removed in 1993? One explanation is that the tax regime may be responding to the oil price, so the fiscal change may be reversible; another is that it might have had disincentive effects not captured in our analysis.

The following sections are included:

• Booming production and dwinding tax-take

• Changes in the fiscal regime

• The contribution of falling oil prices and falling prodution

• Fair deal or raw deal: has fiscal relaxation stimulated exploration and discovery?

• Fair deal or raw deal: Company profitability

• Fair deal or raw deal: international comparisons

• Fair deal or raw deal: some views

• Conclusion: a raw deal made worse by rapid depletion

• REFERENCES

The paper considers arguments why North Sea oil infrastructure should be subject to a regulatory regime with respect to building, operations and granting third party access. Under scrutiny, most of the arguments appear to be extremely weak when applied to UK oil.

The size and longevity of Britain's offshore hydrocarbons resources have been under-estimated. Gas reserves were seriously under-exploited for almost 20 years from the late '60s, given a belief that gas should be used only as a premium fuel and in the context of an uncompetitive market. Oil reserves' development and production has suffered from time to time from inappropriate politico–economic conditions. Nevertheless, offshore oil and gas has come to dominate the UK's energy production over the past 20 years and currently accounts for 85% of the country's total energy output.

Fears for resources' exhaustion remain unjustified, as the industry continues to replace oil and gas reserves used each year. The North Sea is still not comprehensively explored: the continuation of the process will enable oil production to remain at high levels and that of gas to expand further. Supplementary output from the new west of Shetland province will become progressively more important after 2000. But continued intensive production overall depends on the maintenance of attractive politico–economic conditions and on present oil prices. It also requires the European gas market to remain firm but, ironically, the planned flow of UK gas to the mainland constitutes a threat to this condition.

The following sections are included:

• Introduction

• The 'political agenda' on coal

• The economic fundamentals

• Increase in environmental concerns

• The achievement of the Goverment's policy objectives for coal

• Privatisation of the ESI

• Measures to promote coal industry restructuring through subsidy

• Conclusion

Labour productivity in British Coal (BC) increased by 10 per cent per annum between 1985 and 1994 and in 1993–94 it rose by 38 per cent. Our analysis reveals the following key points. The 'official' labour productivity figures for deep-mined coal as announced by BC overstate the true position by as much as 5 per cent per annum. Nevertheless a considerable record of growth remains to be explained. In contrast to most previous studies we argue that capital expenditure was a key determinant and that colliery closures also had a significant, positive effect. Finally we question the standard historical narrative on the British coal industry which suggests that it has been in terminal decline for most of this century. Using Salter's stylised model we conclude that the industry's recent performance does not fit with a generalised model of a declining industry.

The following sections are included:

• Diversity in the energy debate

• The importance of diversity

• A novel approach to the analysis of diversity

• Optimising portfolio diversity

• Exploring the diversity merits of different UK generating options

• Results of sensitivity analysis

• Conclusion

• REFERENCES

This note presents a view of the performance of the privatised British electricity industry from the customer's point of view. While not attempting to construct a detailed estimate of what might have occurred had the previous regime continued, it suggests that significant benefits have been gained.

The electricity pool of England and Wales was created as a generators' pool, with the twin objectives of preserving order-of-merit dispatch and setting marginal-cost pricing signals. It is becoming more apparent that these objectives are not mutually compatible. For example, over the five years since its inception, there have been repeated calls to incorporate more explicitly demand-side pricing signals into the process. A number of reviews by the Pool Executive Committee, OFFER and various consultants have looked at the issue and there have been trial periods of active demand-side bidding. This paper reviews that experience to date.

This paper presents an appraisal of the electricity generation market in England and Wales from its inception to the date of the imposition of the Pool price cap. Spot (Pool) prices were lower than expected but rose strongly. A theoretical discussion and an empirical analysis is conducted and it is argues that, although the Pool was intended to be competitive, this pattern of prices was driven first and foremost by the effect of contracts and, second, by implicit regulation. In other words, prices have been driven largely by intervention, rather than by competition. Further, it is suggested that the undertakings agreed with the regulator may foster co-operation rather than competition and that regulatory attention will be required for the foreseeable future in the 'competitive' market for generation.

The following sections are included:

• Introduction

• Environmental capabilities

• The Study

• Results

• Conclusions

• REFERENCES

The paper review the historic experience of nuclear power in the United Kingdom, the reasons behind the decisions and choices made, and the effects of the 1994 Nuclear Review. The implications for the future of the nuclear industry of the Government's response to the review are discussed.

Nuclear power was always uneconomic in the UK, but under the old CEGB regime, this was largely concealed. Once negotiations to privatise nuclear power took place in 1988 and 1989, it became clear that nuclear power was too costly and too financially risky to be privatised in a competitive structure. In the last five years the public sector nuclear companies have achieved much improved financial results, almost entirely through a sharp increase in incomes consequent on making the AGRs work better. Serendipity rather than market forces is the predominant explanation for this improvement. In the attempt to privatise nuclear power again, lessons have been learned. It has finally become transparent that new nuclear investment remains unprofitable, and while it may be possible to sell the newer stations at a positive price, taxpayers and consumers will receive little from the very large investments and subsidies received by nuclear power over the years, and large unfunded liabilities will remain in the public sector

UK Energy series exhibit pronounced regular but not necessarily fixed seasonal patterns. Failure to reflect such changing patterns in econometric models of energy use can result both in misleading estimates of elasticities and policy responses and in forecasts which under- and over-predict seasonal peaks and troughs. Structural Times Series models permit the formulation, estimation and testing of models which allow for evolving stochastic seasonal components and reflect changing patterns of economic behaviour. Moreover such components can be incorporated into causal regression equations to permit greater flexibility in modelling the seasonal variation than is possible using ordinary dummy variables. By estimating suitable dynamic models which allow for evolving seasonal effects and then nesting the fixed effects models, we compare estimated elasticities and test the restriction of fixed seasonal effects.

MARKAL is a least cost optimisation model used by ETSU to analyse the response of the UK energy system to a range of future fuel price and energy demand scenarios. The system modelled includes both current and future energy production, conversion and demand-side technologies. The model is supported by an extensive database of technology cost and performance data, including emissions of CO₂, SO_x, NO_x and VOCs.

The model has been used to analyse the cost and technical implications of imposing limits on future UK atmospheric emissions, with constraints being applied at the national, sector, sub-sector or technology level. Recent work has included a restructuring of the database to add an oil refinery sector and the incorporation of a sophisticated simulation model of the industrial sector.

The model has been used extensively in support of policy analysis work on behalf of a number of Government Departments, both in the UK and abroad.

A computer model, DREAM-City, has been developed by the Energy and Environment Research Unit at the Open University to assist urban energy planners and Local Authorities in the preparation and monitoring of energy and pollution reduction policies. The model was applied to the city of Leicester and its validity was tested by comparing the model's simulation of the energy supply and demand patterns of Leicester for the years 1984 to 1994 with data on actual demand supplied by the Utilities for the region. The model was then used to create three scenarios of future energy use in Leicester. The scenarios showed that it is possible for Leicester to meet its target of reducing carbon dioxide emissions to 50% of 1990 levels by 2025.

The cointegration technique has grown in the UK from a little noticed model fifteen years ago to a mainstream tool for energy demand modellers. This paper places its growth within the context of developments in dynamic econometric methods. As a result of these theoretical and practical improvements, economists have found that the technique is well-suited for analysing energy demand and its short and long run relationships with its determinants. The use of cointegration has led to improvements in the explanation of past and the prediction of future behaviour, as well as in the assessment of the effects of related policies. The paper suggests that its suitability, popularity and on-going refinements are likely to mean cointegration will continue to grow in importance as a tool for energy demand modelling.

This paper examines arguments for UK government intervention to promote energy efficiency. Those relating to market imperfection and learning curve gains from boosting innovative energy products are not unique; loan terms reflect risks in competitive markets; credit to energy efficiency investors is not unduly limited. Differing fiscal treatments of energy and efficiency goods distort choice, but the 8.8 % pricing difference does not justify intervention. The case for saving supply investment is invalid where tariffs reflect marginal supply costs, the terms for financing supply and use capex is not distorted, and no constraints on capacity remain. The case for UK energy efficiency intervention to climate change is misguided. A case exists for increasing energy prices to reflect external costs, thereby raising energy prices markedly and greatly improving energy efficiency; but the "externality adders" are unknown, and UK governments would not adopt this first best option. The energy depletion argument fails because past government interventions demonstrate that states are not omniscient, fail to provide adequate services in the public sector, are slow to adjust, and seldom cost-effective. Overall, they should not intervene in energy markets other than by taxation to reflect external costs. One exception is in its own estate where its record is poor; it could also improve conservation in council housing.

This paper looks at the problem of defining and measuring energy efficiency, and the conflicts that arise from imprecise definitions. While energy efficiency is easy to define in a theoretical sense it is hard to measure due to problem in assessing energy (service) outputs. One solution is the development of indicators, like energy intensity, but simple indicators can give contradictory results. This is illustrated with three examples from the UK domestic sector. More complex indicators require extensive data collection and are difficult to track over time. Conflicts in the policy debate arise from confusion over the goal of energy efficiency: is it about saving money, saving energy or saving the world (by reducing CO₂ emissions)? Particular conflict arise from electricity use, whose use is efficient in terms of delivered energy but inefficient in primary energy. A further source of debate, started by Len Brookes, arises over whether increased efficiency will indeed lead to reduced energy consumption. The paper attempts to define the issues and concludes by offering some policies which might satisfy the various parties in the debate and lead to reduced CO₂ emissions.

Improving energy efficiency has few critics. An investment which saves money, slows down the exhaustion of limited resources and checks environmental damage seems ideal. However, in practice, this notion is often not well-understood. This paper discusses the two related concepts of energy efficiency and intensity. Intensity measures are constructed for the UK since 1960 for the following sectors: domestic, passenger travel, freight transport, industry and the whole economy. Intensities can change because of compositional changes, genuine efficiency gains or through income effects, usually seen as comfort/features improvements.

Different output measures are contrasted in each of the sectors, showing how conclusions about the economy's energy use can be altered by using different metrics. These measures are used to explore the feasibility of government targets for energy savings from efficiency improvements. There is scope for the transport sector to contribute, with only slight reductions in intensity of energy use required. In contrast, marked reductions in domestic energy intensities is necessary to achieve change. This sector is currently the main focus of public policy. Policy may need to shift its emphasis to be successful, spreading the burden more widely.

This paper was requested, in the early stages of Conference planning, by the late Jane Carter. She was an inspiration to many, especially in the field of energy efficiency and in international energy networks of all kinds. In particular, she contributed greatly to many activities of the BIEE and IAEE. I feel very privileged to have known her and dedicate this paper to her memory.

This paper is based on a working paper, 'Fiscal policy and GG abatement in four EU economies and in Switzerland: existing and proposed policies in Germany, France, the Netherlands, Switzerland and the UK', prepared by the author, Nick Johnstone (now at the International Institute for Environment and Development, UCL, London) and Stefan Speck at the Wuppertal Institute. Both papers report research undertaken in the project 'Greenhouse gas abatement through fiscal policy in the European Union', funded by the Commission for the European Communities, DG XII/D5 Project PL932358, Research Area in, Phase 2. The support of DG XII for the research is gratefully acknowledged along with the contributions of the co-operating organisations: C3ED, University of Versailles, France; SEO, University of Amsterdam, Netherlands; INFRAS, Zürich, Switzerland; and the Wuppertal Institute for Climate, Environment and Energy, Germany. The views expressed in the paper is strictly that of the author. Please note that this is a working paper: comments are gratefully received. Please do not quote without the permission of the author.

This paper outlines the fiscal policies adopted by the UK to reduce greenhouse gas (GG) emissions and compares them very briefly with those in some other European states, in particular Germany, France, the Netherlands, the UK and Switzerland. It reviews existing taxes and subsidies and new policies being proposed following acceptance of the Rio Convention on Climate Change. The paper concludes with a discussion of the issues raised by the use of fiscal policy to attain environmental objectives and a brief critical review of the policies, including the European Commission's proposed carbon/energy tax.

The supply and use of energy is a major contributor to emissions of greenhouse gases, acidic gases, and other pollutants associated with poor air quality. Different forms of electricity generation can lead to widely varying emissions of pollutants from all stages of the fuel cycle, depending on the fuel used, energy required for extraction and processing, and abatement technologies installed.

Results are presented from a recent study which assessed emissions of eight pollutants over the full fuel cycle for eight electricity generating technologies currently in use in the UK. The emissions associated with an 'average' unit of electricity generated in the UK are also calculated. The global warming 'equivalent' of each of the fuel cycles (expressed in terms of equivalent grammes of CO₂ per unit of electricity) and of the average mix are also derived, using the latest recommendations from the Intergovernmental Panel on Climate Change on the global warming potentials of each of the direct greenhouse gases.

Work is also presented on the application of an impact pathway approach for the evaluation of the environmental impacts of full fuel cycle emissions associated with a fossil fuel power station.

The interaction between transport and UK energy policy has changed over time in response to fluctuations in economic and social priorities and as technology and scientific knowledge has developed. The key link between current UK transport and energy policies is via the environmental concern over the damage associated with CO₂ emissions. Transport is a major and growing contributor to global warming gas emissions and, while other forms of environmental damage may be reduced by various forms of technological end-of-pipe treatments, quick-fix technical solutions to the CO₂ problem are not available. This contribution outlines the main underlying issues associated with the links between transport, energy and the environment, sets out potential policy responses and discusses recent UK policy initiatives.

The paper addresses the issue of road vehicle pollution in the United Kingdom and the policy response to the problem. The issues are wide ranging, the focus here is on solutions relating to individual vehicles and their emissions where improvements may be achieved without action in related areas. Consideration is given to policy instruments that might bring about technological or behavioural change.

In this paper we examine the relative contributions of the UK transport sector to total UK energy use and carbon dioxide emissions. Focusing on road transport, we examine recent trends in vehicle fuel consumption and discuss opportunities for improvement. Using a set of models developed under ESRC grant number L119251013 we examine the relative effectiveness of various government policies in terms of improved fuel efficiency and carbon dioxide emission reductions.

For much of the post-war period, British governments had 'energy policies' which were powerfully influenced by coal, nuclear and other lobbies. Privatisation, though carried out imperfectly, is increasing the power of consumers and reducing the politicisation of the market. The European Commission has, however, produced proposals for a European-wide energy policy which would be in the mould of Britain's pre-privatisation policies, relying on well-worn and discredited market failure arguments. The market failure approach to policy-making, which assumes that a 'perfect' market is achievable and desirable, seems likely to lead to endless interference and to hinder the adjustment capacities of markets. Market solutions should be favoured not because they are perfect but because they are better than the alternative of a politicised market.

If the Commission's proposals were put into effect, they would lead back to the bad old days of an energy policy driven by short-termism and excessive lobbying.

This paper discusses two major issues in UK energy regulation. The first concerns the idea (or ideal) of "regulation for competition" practised in the UK. This means that attention naturally focuses on regulation of access prices to network transportation facilities and the creation of markets for purchase and supply of electricity and gas. The second issue is the appropriate scope of regulation. How might it be determined that some industries require a dedicated regulator whilst others do not? What are the benefits of regulation? Some light is cast on these questions by means of comparisons between gas and oil.

China's power sector is likely to encounter considerable difficulty meeting its immediate challenges without substantial restructuring. The experience of the UK electricity industry holds a number of important lessons for China, both positive and negative. Wholesale privatisation of China's power industry is inappropriate at present because of the presence of formidable political and institutional obstacles. However elements of the restructuring of both the industry and the market in the UK may be applicable in China.

The following sections are included:

• Introduction

• Innovative and demonstrative features of the E&W model

• Key lessons from experience with the E&W model

• Particular relevance of the E&W model to developing countries

• Conclusion

The following sections are included:

• Introduction

• The UK energy experience: an assessment

• International applicability

• Outstanding issues

• Conclusions

The following sections are included:

• FOREWORD

• INTRODUCTION

• CONTENTS