MANDELSON ANNOUNCES REFORMS OF THE ENERGY MARKET

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

competitive market:

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%

lower;

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

stations.

'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

domestic sector.

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

overseas organisations.

Notes

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:

http://www.dti.gov.uk

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.