As we prepare to publish our Future of Energy report, it seems an apt time to look back at some of the key milestones in the industry’s evolution that took us to where we are today.
Back in 1882, the Electric Lighting Act controlled the setting up of supply companies under legislation for the first time but by the end of the First World War the industry had developed in a somewhat ramshackle manner with businesses owned by local municipalities and a handful by investors.
With little regulation, it was not unusual to find a mixture of current, voltage, frequency and wiring adopted across the network system - in addition to municipalities exercising the compulsory purchasing of supply businesses and the application of maximum price regulation. And although now it’s hard to imagine this industry operating without any health and safety rules(!), we had to wait until 1909 before we saw any sign of regulated planning consents for the building of power stations.
By 1917, a report commissioned by the Board of Trade suggested that the industry be unified with state regulation and finance. Although this proposal was rejected at the time, it did lead to the introduction of the Electricity (Supply) Act 1919 that set up an Electricity Commission and a number of regional joint electricity authorities. Legislation followed to establish a Central Electricity Board alongside the creation of an integrated 132kV national grid.
Fast forward past the Second World War to 1948 and we saw the establishment of the British Electricity Authority (BEA), creating a central authority and 14 area boards by nationalising more than 600 small power supply companies, municipal electricity departments and dissolving the Central Electricity Board. The BEA was responsible for the generation, distribution and sale of electricity to users in England and Wales. Scotland remained independent. The Central Electricity Generating Board (CEGB) followed in 1957.
The next major reorganisation for the industry took place in 1990 as the Thatcher government oversaw a wave of privatisations for what had been publicly owned utilities. We saw both the Energy Act 1989 providing for the privatisation of the CEGB and the creation of the Electricity Pool, a contract between generators and suppliers. Generation assets were transferred to National Power, Powergen and eventually Nuclear Electric, which in 1996 became British Energy. In addition, transmission activities were passed onto the National Grid Company and 12 Regional Electricity companies were established alongside 12 Distribution Network Operator companies.
The decade also saw several structural changes delivered including the introduction of competition allowing the electricity companies to compete for customers outside of their own region. In 1995, a Trafalgar House bid to take over Northern Electric plc was the first of a number of mergers and acquisitions, a process that of course continues to this day. Further change came at the start of the Millennium when the Government launched the New Electricity Trading Arrangements with the industry regulator allowing supply companies to merge with generator companies and other supply businesses, introducing the concept of vertical integration to the sector.
The industry structure has moved on a long way since then. A number of different business models are being developed and adopted at a rapid pace and we have seen significant changes within the last few years - some driven by investment decisions, others by environmental considerations and most recently due to regulatory and policy developments.
While the large vertically integrated companies known collectively as ‘The Big 6’ once dominated the industry, times have definitely changed. Indeed the Competition and Markets Authority’s weighty 2016 investigation into the energy industry quickly dismissed vertical integration as a threat to competition which was underlined by the fact that some of The Big 6 were moving away from the model anyway. Ofgem had introduced its Secure and Promote regulation in 2014 that sought to increase liquidity in the supply market and enable increased competition.
In recent years, we’ve seen several large generation stations close or change hands and we lead the world in our development and use of new sources like wind - both on and offshore. This has enabled our sector to lead the way in the UK’s decarbonisation drive with 61% of carbon emission reductions from 2010 to 2017 attributed to the power industry.
New entrants continue to spring up everywhere competing to deliver a wide range of services. As recently as 2012, there were only 20 retail energy suppliers – now there are more than 60 vying for business.
There are bespoke supply offerings including, for example, capacity aggregation services which provide demand side reduction capability and reward customers for reducing demand at times that assist National Grid balance loads on the Transmission Network, and even support rise of the ‘prosumers’ with their own generation capability and a raft of community energy schemes. Taking us back to the start of this article, we’ve also seen local authorities once again establishing energy supply companies which both own generation assets and provide electricity to their constituents.
So we’ve seen that some aspects of the industry have come full circle. Generators are seeking to connect within the distribution network, in order to deliver locally produced supply to a new range of customers. And again looking back at where we came from, we can importantly point to a long track record of standardising and actively operating our networks and power stations in a healthier and safer manner.
It’s a real lollapalooza as decentralisation and the decarbonisation agenda has increasingly driven these exciting changes – and with an even more extensive transformation – as outlined in the Future of Energy - in prospect, it’s fair to say that you ain’t seen nothing yet!
Barbara Vest, Special Advisor