safeguard the security and diversity of our long term energy
supplies, at lower prices, were set out in the Energy White Paper
published yesterday by trade and industry secretary Peter Mandelson.
consideration of the many views received on the government's
proposals, and a full examination of all the energy policy issues.
This showed that, without action to address market distortions,
electricity prices would be higher than necessary and diversity and
security of energy supplies would suffer.
Mr Mandelson said:
'I am convinced that competitive markets are the best means of
stimulating efficiency in industry, of providing consumers with real
choice and bringing down prices. They are the cornerstone of our
approach to energy and power generation. They are fundamental to
achieving our aims of secure, diverse and sustainable supplies of
energy at competitive prices.
'Our predecessors botched the process of electricity privatisation.
They failed to introduce effective competition or to protect the
long-term public interest in diversity of supplies; they failed to
level the playing field for different fuels; and they risked losing
the option of generating electricity from coal, with the obvious
threat to our economic security.
'The Energy Review has shown how, despite the attempt to establish
competition, the market was distorted by the structure of the
generation industry - the concentrated ownership of coal-fired plant
- and the electricity trading arrangements (the Pool). This
encouraged a rush of new investment in gas-fired generation and
continues to produce higher prices than necessary, as well as the
risk of overdependence on one fuel source.
'While some move towards gas was to be expected, the Review has
concluded that the comparative costs of new gas-fired stations as
against the existing coal-fired power stations cannot justify the
scale and speed of the 'dash for gas'. In allowing these distortions
and their effects to persist, our predecessors failed to take account
of the need for a diverse energy supply policy. They left a situation
in which gas' share of power generation could exceed 60% by 2003 with
coal's share less than 10%.
'The result is that our energy security and diversity are being put
at risk by the market distortions. The purpose of the Review was to
achieve ways of correcting the past failure to create a properly
competitive market in power generation and to safeguard the long-term
public interest in secure, diverse supplies.
'For these reasons, the government is confirming today its intention
to embark upon a very radical reform agenda to ensure a fully
divestment by the major generators, to ensure competition in and
more intensive use of coal-fired flexible plant;
a radical overhaul of the electricity pool to ensure prices are
competitive, and that flexible plant is properly rewarded. Wholesale
prices should come down, by at least 10%;
full competition among companies supplying customers with
electricity. Prices on offer to domestic customers are already 10%
a proper regulatory framework separating monopoly (distribution)
from competitive (supply) activities;
continuing to press for open markets in Europe.
'In the meanwhile, our security and diversity of supply will be
guaranteed by a stricter consents policy on new gas-fired power
'The stricter power station consents policy will be temporary and
last only as long as it takes substantially to complete our reform
agenda across the picture. I will receive the advice of the Director
General of Electricity Supply on this progress. Projects which help
to promote our energy policy and sustainable development objectives,
such as good quality combined heat and power (CHP) schemes and
renewables schemes should be consistent with our energy policy.
'This policy has no guaranteed market share for coal. The coal
industry has asked for fairness not favours. This is what the
Government's policy offers.
'Coal can and should still play a significant role in electricity
security and diversity, though British coal will only be able to do
this to the extent it is commercially attractive to the generators.
If it can be competitive, then it has a good future. The industry's
future lies in its own hands.
'The government is establishing a clear direction to energy policy
after a long period of drift under the previous government. Our
overall goal is a competitive market that can operate more vigorously
and effectively, while meeting our objectives of secure, diverse and
sustainable supplies of energy.'
Progress is already under way on the reform programme. As announced
today by energy minister John Battle, the government has decided that
the direction set out in Professor Littlechild's proposals on the
reform of the electricity market in England and Wales is the right
way forward and further work on these proposals will now commence.
The government believes there should be falls of at least 10 per cent
in wholesale electricity prices in the medium term, in addition to
the strong downward pressure on prices from competition in the
Divestment of coal-fired plant will strengthen competition and bring
prices down. The secretary of state is currently seeking undertakings
from Powergen, under the merger provisions of the Fair Trading Act
1973, that the company will dispose of four gigawatts of good quality
coal-fired plant in order to remedy adverse competition effects from
its acquisition of East Midlands Electricity.
National Power has also informed the government that it is
considering the options for practical opportunities for divestment of
coal-fired plant in the context of its business strategy.
The government also welcomes the announcement on 23 September 1998 by
Eastern Group that it intends to fit FGD (Flue Gas Desulphurisation)
equipment to its two gigawatt coal-fired station at West Burton,
Retford. This will make a major contribution to reducing UK sulphur
emissions and improving air quality. The White Paper sets out the
government's policy of encouraging all major coal-fired generators to
have FGD in their portfolio, and should run that plant more
intensively than any unabated coal or oil plant. It also sets out how
the new policy fits in with the priority of tackling climate change.
The Environment Agency has informed the government that, in the light
of the Review, while still fully protecting the environment with its
system of sulphur regulation, it considers there may be opportunity
to increase the scope for competition while minimising the practical
constraints on the generators in purchasing and using coal.
Before preparing the final conclusions, ministers listened carefully
to a number of concerns from business. They decided that it is not
generally desirable to intervene in the terms of gas supply contracts
to power stations, using powers under Section 14(2) of the Energy Act
1976. However, the government will continue to monitor the position
on any new contracts which combine a high level of 'take-or-pay'
conditions with a prohibition on re-selling the gas.
The government is also maintaining a programme of research on clean
coal technology, to act as a focus for R&D collaboration and enable
substantial research to be initiated with industry, universities and
1. Copies of the White Paper 'Conclusions of The Review of Energy
Sources for Power Generation and Government response to fourth and
fifth Reports of the Trade and Industry Committee', Cm 4071, cost
£17.85, are available from: The Stationery Office, The Publications
Centre, PO Box 276, London SW8 5DT. Telephone: 0171 873 0011.
Parliamentary Hotline Lo Call 0345 02 34 74. Fax: 0171-873 8200.
Text of the document will appear on the DTI Internet address:
2. Energy minister John Battle yesterday announced how the government
intends to take forward reform of the electricity Pool.
3. A document setting out the government's proposals for consultation
was published by president of the board of trade Margaret Beckett on
25 June 1998.
4. Problems identified during the review include:
new gas entry into the market has been substantial but this has not
significantly increased competition nor has it led to the expected
falls in the price of electricity;
the electricity Pool, set up in 1990, has led to distortions which
have affected the choice of energy sources for power stations;
the distortions have favoured gas plant which is operated
inflexibly over flexible coal plant;
they have led to a building boom in gas-fired stations to the
detriment of coal-fired ones;
electricity cannot be stored so needs to be produced on demand
(hourly and daily requirements differ) - coal-fired capacity is
currently providing this flexibility and gas stations are not;
as a result of the distorted market, dependence on gas could rise
sharply, reaching over 75 per cent of electricity generation by 2020
(much of it imported from outside the EU), raising concerns over
diversity and security of supply.
5. The intention to carry out the review was announced by energy
minister John Battle on 3 December 1997. The terms of reference for the review were published by Mrs Beckett on 22 December 1997.