I. Title of the Best Practice

II. Overview of the Best Practice

A. Electricity liberalisation context
The UK energy scene has changed significantly following the privatisation of most public sector industries over the last 15 years or so. The change was driven by the previous Government, principally at first on the ideological grounds that the state formed too large a slice of the economy and should be reduced, and that many things it did could be done better by the private sector. The first major energy privatisation - of British Gas - effectively swapped a public monopoly for a private one - not obviously a step forward in liberalising the energy market. However, lessons were learned, and the privatisation of electricity four years later in 1990 did introduce some aspects of competition within it. This note gives a summary of the effects that electricity liberalisation have had in the UK, the changing market structure of the electricity industry, independent regulation, electricity trading, nuclear generation within the liberalisation of the market, and an outline of some further steps that we are taking in the UK.

The changes that we in the UK have been through mean that we have certain experiences to draw on when it comes to considering the positives and negatives of privatisation and the introduction of competition. That experience is something other countries can draw on when considering their own ways forward.

B. Effects of electricity liberalisation
The introduction of competition in electricity and gas supply was completed on Monday 24 May 1999. All customers including domestic customers may now choose their gas and electricity suppliers. In the UK, electricity liberalisation has resulted in greater competition which, in turn, has brought benefits, particularly in terms of significant price reductions. Between 1990 and 1997 industrial electricity prices fell by 21% in real terms and domestic prices (including VAT) fell by 9% in the same period. And during 1998 prices fell by just over 1% for industrial users and 6.5% for domestic customers.

The increase in competition in the UK electricity industry is illustrated by the number of new entrants who have penetrated the market and the change in market shares. The number of major generators has increased from one pre-privatisation, the Central Electricity Generating Board (CEGB), to 30 at the end of 1998. And the market share of the two largest generators, National Power and PowerGen, fallen from 78% in 1990 to 39% in 1997/98.

One of the most dramatic changes since 1990 has been the change in the fuel mix, with a large shift from coal to gas generation. In 1990 coal accounted for 70% of generation but by 1998 this had fallen to 35%. In that time, gas has gone from zero to 31%. Nuclear has increased its share from 20% to 28%, primarily because the reliability and availability of nuclear stations has improved.

C. Market structure
Ten years ago, the industry was dominated by an integrated undertaking, the Central Electricity Generating Board, which accounted for 95% of generation and also ran the transmission system. There were 12 Area Boards in England and Wales, which had the monopoly of distribution and supply in their respective areas, and a few small private generators. When the industry was restructured in April 1990, the CEGB was divided into three competing generators (two fossil fuel generators, National Power and PowerGen, and a nuclear generator, Nuclear Electric), an independent transmission company, the National Grid Company (NGC), was set up and the Area Boards were renamed regional electricity companies (RECs). We took the decision to privatise the companies at the same time, with one exception. Although we had planned to sell off the nuclear stations in 1990, we did not do so because it emerged during the preparations for privatisation that the decommissioning costs were a lot higher than we had anticipated.

Since privatisation, the structure has developed further, with mergers of distribution companies (Scottish Power/Manweb, Scottish Hydro/Southern Electric) vertical integration (PowerGen East Midlands, Eastern's generating plant, and the merger of National Power and the supply business of Midlands Electricity) and overseas takeovers including US takeovers of several RECs, Electricite de Frances's merger with London Electricity; and overseas acquisitions such as those by National Power, PowerGen, British Energy, Eastern, and Scottish Power.

A key feature of the new industry structure is that NGC is a totally independent company. Our experience has shown that separation of transmission activities from the other activities is a crucial factor in the development of competition.

D. Regulation
At the same time as we restructured the industry, we also set up an independent regulator, the Director General of Electricity Supply, as it was clear that regulation would be needed for those elements of the system where there was no competition. These were the natural monopolies of transmission and distribution, and the part of the supply market which was for the initial period not open to competition. The regulator has a range of duties including the promotion of competition, the control of prices where there is no competition, and the protection of consumers. In light of the convergence of electricity and gas markets, the Government concluded that it should merge the offices and the posts of Director General of Electricity Supply and Director General of Gas Supply. A new regulator, Callum McCarthy was appointed to both posts and is now in the process of merging his offices. Formal merger of the legal role of the regulators will follow when a legislative slot is made available, perhaps in the Autumn of 1999.

E. Environment
A major - and initially unexpected - beneficiary of this change has been the environment. The switch from coal-fired to gas-fired technology for electricity generation has significantly reduced our emissions of carbon dioxide. Between 1990 and 1997, carbon dioxide emissions from the electricity supply industry fell by about 20% - from 54 MtC in 1990 to around 40 MtC in 1997; this reduction is expected to continue beyond 2000. These reductions have been the most significant factor enabling the UK to exceed the target of returning its greenhouse gas emissions to 1990 levels by 2000, and puts us well on course for meeting the Kyoto target. There have also been similar reductions in our emissions of sulphur and nitrogen oxides and of smoke and dust.

These emission reductions have been welcome consequences of the liberalisation process. But the lower consumer prices achieved through greater efficiency - in themselves good things - provide the wrong kind of signals when current concerns about energy-related emissions and climate change drive us towards trying to reduce energy consumption and to increase energy efficiency. If energy costs less, then there is less incentive for most people to be economical. This is a conundrum which we will have to address: we want both the benefits for consumers and protection for the environment, and getting both in equal measure may not be easy.

F. Next stages
Ten years on, we recognise that, although our system has been very successful, there is still room for improvement in some areas. The electricity wholesale market - the Pool - is to be replaced by a new market, similar to other commodity markets, and comprising a forward market, balancing mechanism, and settlement process. Work is in hand to implement this and a target date of next year has been set for completion. There have also been concerns about the continuing market power of the major generators, and this has been tackled by means of voluntary divestment of power plant. We have also introduced, as a temporary measure, a stricter policy on gas-fired power station consents to ensure that the existing distortions within the Pool do not further tilt the balance against other fuels while the implementation of the new trading arrangements, which offer a more level playing field for all fuels, is being taken forward.

III. Categorizing the Best Practice

1. Classifications
( X ) Regulatory approach
( ) Practical action
( ) Social network mechanism

2. Social actions involved
( ) Citizens
( X ) Central Government
( ) Local Government
( X ) Business

3. Sector(s)
( X ) Energy
( ) Household
( ) Transportation
( ) Industrial enterprises
( ) Other (Non-Industrial) Business
( ) Agriculture/land use/forestry
( ) Other

4. Target greenhouse gas(es)
( X ) CO2
( X ) CH4
( ) N2O
( ) HFC
( ) PFC
( ) SF6
( ) Other

IV. List of Attachments

None

V. Contact

Contact Person:	Terry Carrington
Organization:	Department of Trade and Industry
Tel:	+44 171 215 5845
Fax:	+44 171 215 5846
Address:	151 Buckingham Palace Road, London SW1W, United Kingdom
Note:	N/A