Utilities

Price convergence and the consolidation of suppliers are the two main features affecting the UK utilities market, says Datamonitor's report — Selling power and gas to major energy users in the UK. These factors reflect the maturing of the market. In the water market competition has occurred to a lesser extent and, therefore, prices are flatter. But, as competition increases, it is likely that prices will reflect this process.

Although savings can still be made by switching gas and electricity suppliers, this is only likely to be a short-term to medium-term possibility as prices converge. This convergence runs in conjunction with supplier consolidation. And this ongoing process is evidenced by Innogy's acquisition of Yorkshire Electricity in February. As the market matures, Datamonitor believes that suppliers will look to improving customer service and creating add-on services in order to retain customers.

Competition — electricity
In April 1990, customers with a demand in excess of 1MW could choose their supplier — this affected 5,100 large industrial sites. In 1994 this was extended to customers in the 100kW-1MW market. The final stage in competition began in September 1998, when the domestic and sub-100kW users were able to choose suppliers. Such competition has led to an increasing level of customers switching as they search for the best prices. Prices are decreasing year-on-year.

Competition — gas
The interruptible gas sector is one of the smallest by volume, accounting for 12 per cent says Datamonitor. The majority of users in this sector are major industrial customers who are given concessionary rates by gas suppliers for agreeing to receive a supply which can be stopped at short notice. The large firm market is the biggest sector — accounting for nearly 20 per cent of the country's total demand.

In 1986 British Gas was privatised and, theoretically, supply was open to competition for all customers using over 25,000 therms a year. In reality, British Gas used its might to purchase gas from the oil and gas majors and so managed to retain its 100 per cent share of the supply market. In 1992, the Competition and Service (Utilities) Act required that choice be extended to customers using above 2,500 therms a year. Eventually, in 1993, the Office of Fair Trading and the MMC imposed a market share target that British Gas should lose 60 per cent of its customer base before price restrictions could be reviewed. British Gas was forced to release gas to other customers. It was also forced to separate its transportation and storage business (Transco) from its trading and supply business. As with electricity, competition has led to price decreases (see table).

New Electricity Trading Arrangements (NETA)
This was launched in April by the then energy minister Peter Hain and the Office for gas and electricity markets (Ofgem) chief executive Callum McCarthy. Its aim is to reduce electricity bills paid by commercial customers. NETA replaces the Electricity Pool which was set up following privatisation and, according to Ofgem, wholesale prices in England and Wales have fallen by an estimated 35 per cent during the past two years.

Basically, NETA is a new wholesale market, comprising trading between electricity generators and suppliers in England and Wales. Under NETA, bulk electricity will be traded forward through bilateral contracts and on one or more power exchanges.

Competition — water
On 1 March 2000, the Competition Act 1998 came into effect. This prohibits companies from entering into agreements that are anti-competitive and prohibits the abuse of a dominant position. Customers can currently choose between regulated and non-regulated water suppliers. They can also use their own on-site water resources or waste treatment plant.

Perhaps the most radical new aspect of the water sector is the arrival of inset appointments allowing one company to replace another as statutory undertaker for a specified geographical area.

The easiest way to achieve this is if the incumbent consents to change its boundary — this is unlikely as the incumbent has no incentive unless it receives something in return. If this does not happen then an inset can be granted for a site if there is no connection to the public supply.

Alternatively, if there is an existing supply within the proposed inset area then the customer can consent to a change of supplier if it uses at least 250 megalitres a year (Ml/y). Presently this criteria only applies to around 500 large users. However, the government is expected to lower this threshold to 100Ml/y which will allow an additional 1,500 additional large users. (For more information contact Ofgem, see trade organisation listings, below).

Tendering/contract negotiation methods
For electricity, overall, 37.5 per cent of respondents which used 100kW-1MW used an energy broker to tender for their contracts, with 76.2 per cent of 1MW users employing the services of an energy broker. As Datamonitor points out, the good old letter is still used by 22 per cent of respondents, while interestingly email is showing its strength.

In the natural gas category, energy brokers also came out top, with the overall average number of companies using an energy broker being 40.3 per cent. However, up to 27 per cent of respondents chose to tender for their supply using email — an option that Datamonitor believes will increase in the future.

As with the tendering processes, most companies choose to use energy brokers for any contract negotiations. Seventy one per cent of those on large sites used an energy broker for their electricity contract negotiations and 55 per cent negotiated over the phone. In medium sites 35 per cent used energy brokers and 15 per cent used the phone/fax. Similarly, for natural gas contract negotiations, an average of 40 per cent of the respondents used an energy broker.

Energy brokers
The newly competitive energy markets have led to an increase in the use of energy brokers, who will arrange the best deal for their clients. According to Datamonitor figures, 43 per cent buy electricity through a broker and 34.3 per cent purchase gas. Only a small percentage of clients buy water, which is unsurprising considering that only a small share of the market (7.5 per cent ) is competitive. However, Datamonitor predicts that by 2002, energy brokers will become even more prevalent, with 58 per cent of clients expecting to purchase their electricity through brokers, 51 per cent expecting to purchase natural gas, 30 per cent expecting to purchase water and 20 per cent expecting to purchase telecoms through a broker.

Trade organisations

Association of Electricity Producers
Tel: 020 7930 9390

Office of Water Services (Ofwat)
Tel: 0121 625 1300
Fax: 0121 625 1400
www.ofwat.gov.uk

Office of gas and electricity markets
London
Tel: 020 7901 7000
Fax: 020 7901 7066
Scotland
Tel: 0141 331 2678
Fax: 0141 331 2777
www.ofgem.gov.uk

Department of Trade and Industry:
www.dti.gov.uk/energy/energystatistics