Trade mission participants discover that electricity privatization in the United Kingdom opens opportunities for U.S. power industry

Despite numerous unanswered questions, Prime Minister Margaret Thatcher is committed to the privatization of the United Kingdom's electric power system. A recent trade mission of 10 U.S. companies discovered that new opportunities for the power industry are arising in electric power generation, transmission, and distribution equipment and services.

Under Thatcher's privatization initiative, the 65,000-mw system under the authority of the Central Electricity Generating Board (CEGB) will become three publicly held companies on Jan. 1, 1990. National Power will receive 70 percent of CEGB's generating capacity, including its nuclear assets, PowerGen will receive the remaining 30 percent. The National Grid Company will inherit CEGB's transmission assets.

The twelve government-owned area distribution boards will also be privatized under the law. The new distribution companies will assume CEGB's obligation to supply, and may purchase power from, National Power, PowerGen, and independent power producers. To ensure equal access to the transmission network, the distribution companies will jointly hold all of the shares of National Grid. National Grid will be responsible for "wheeling" power between distribution companies and independent power producers. To promote competition among the area boards each company is legally obligated to distribute power supplied by another distribution company, and must do so at its own retail rates.

Although Britain has had a private power law on the books since 1983, independent power generation has failed to take hold. Many believe that this is because the Central Electricity Generating Board, the government-owned generation and transmission company, has held a monopoly on transmission. The new Private Power law, which took effect this summer, corrects this problem by privatizing CEGB and guaranteeing access to the national grid by independent power producers and privatized distribution companies.

Members of the U.S. trade mission learned that all independent companies producing more than 50 mw will be licensed by the U.K. Department of Energy and must conform to the grid code established by National Grid. Under the new system, independent power producers will be divided into tiers. First-tier producers will contract with National Grid and the distribution companies for the sale of power. Second-tier producers will contract directly with consumers.

The anticipated market for second-tier producers, according to Michael Day, Senior Manager of Ernst and Whinney's Utility Group, are industrial and commercial consumers with loads greater than 10 mw. In the case of second-tier producers, the local distribution company is obligated to distribute the power at non-discriminatory rates.

Independent producers over 100 mw will be subject to merit order dispatch. National Grid will determine the load for each half-hour period and dispatch electricity according to the energy price in their contract with National Grid, distribution companies, and consumers. Producers with energy costs that are too high to be dispatched can enter the spot market for power by lowering their energy cost. Contracted plants not dispatched will still receive payment for their capacity value.

Representatives of the Area Distribution Boards told the trade mission that the newly privatized companies will be permitted to independently generate 20 percent of their winter peak demand. To fill this need many of the new distribution companies have expressed an interest in developing plants, either alone or in joint ventures. Jim Smith, Director of the Eastern Electricity Board, indicated that his company is interested in joining a consortium to build a 300-500-mw gas-fired plant, noting that this technology will produce power at a price competitive with the economies of scale that National Power and PowerGen will possess following privatization.

Mr. A. Gaskell, of Kennedy and Donkin, a consulting firm to four of the area boards, confirmed that combined cycle, gas turbine technology is preferred, and added that if true competition prevails, the U.K. manufacturers of such equipment will be unable to fill the potential market.

Several power plants owned and operated by independent power producers are also under discussion. Thames Power, a consortium headed by Taylor Woodrow Construction Corporation, has proposed building a 1,000-mw private power plant. Other private power plants under consideration include a gas-fired plant developed by a consortium headed by Ranger Oil Ltd. and PowerGen and a 600-700-mw gas-fired combined cycle plant being considered by Constant Group PLC, Energy and Construction. Both companies will procure on a worldwide basis and are also looking for joint-venture partners for other private projects in Britain and elsewhere.

Barriers to entry for independent power producers are still evident, however. There is no standard contract for the purchase of power from independent producers. Further, the purchase price for power is unknown and many developers feel that it must rise from the current 5.4 cents/kWh to 7.8 cents/kWh for an adequate rate of return for private power producers. Also, the feasibility of a merit order dispatching system based on the half-hour is in doubt, as is the system's capacity for complicated wheeling arrangements.

Finally, many British power experts told trade mission members that they fear that National Power and PowerGen, with their large generating capacities and economies of scale, may try to bar independent power producers from entering the market. They may do so by undercutting the price of independent power production and by monopolizing the real estate for potential power projects in the south of Britain, the area of the country with the largest load growth.

The 10 U.S. companies participating on the trip were Allen & Hoshall, Inc., Brown and Root, International, Power Technologies, Control Data Corporation, Cooper Power Systems, General Electric Power Systems, Integral Corporation, W.M. Lewis & Associates, Inc., Utility Consultants, Inc., and Westinghouse Electric Co. S.A. They met with representatives of CEGB, area distribution boards, legislative bodies, utility consultants, and private power developers to determine how privatization will unfold under the Thatcher government.

Jay Brandes, Capital Goods & International Construction, International Trade Administration, and William Polen, Energy Advisor to the U.S. Agency for International Development

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