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< EC pours scorn on water plans | Gas storage essential to counterbalance wind >
Electricity connections market hots up
The market for electricity connections is still less competitive than that in the gas sector, but reforms by regulator Ofgem seem to be triggering change. Brendan Coyne reports on incumbents and independents hoping to make their mark.
At the recent SBGI utility connections conference, Michael Ankers, chief executive of the Construction Products Association, outlined the scale of the decline in housebuilding, and its inevitable impact on electricity connections. The fourth quarter of 2008 was the nadir, with only 20,000 new homes started, less than half the number started in Q4 2007. The total number of new houses built in Britain in 2008 was the lowest since 1924. "There was genuine fear," said Ankers.
Recent figures show a slight recovery. The first quarter of 2010 was up 8 per cent on Q4 2009, but percentages are less meaningful when starting from such a low base. Public spending helped drive the recovery, but with government coffers empty and industrial and commercial sectors under pressure, a connections boom remains some way off.
For independents, though, Ofgem's recent reforms provide a chance to grow despite the low demand. Mark Cummings of independent distribution network operator (IDNO) Energetics says new IDNO tariffs and the abolition of punitive and expensive metering at residential sites will level the playing field for incumbents and independents.
Revenue for investment
"The new tariffs aren't the best but at least there will be revenues that enable us to get investment in terms of being able to purchase networks. The tariffs, their structure and the fact that boundary metering has been found unnecessary are a big help," he says.
"We can compete throughout the country whereas previously we were unable to expand in some areas. Now we can give developers a choice other than the incumbent, which means consumers are protected. Customers can contrast and compare rather than having to write to the incumbent, hope to get a response and then be given a 'take it or leave it' price with all the cash up front."
The regulator's work on IDNO tariffs is nearly done, according to Cummings. However, he says there are still problems for independent connections providers that want to get points of connection back and need published timescales.
EDF, as the biggest incumbent distribution network operator, has the most to lose from competition. In 2008 - the latest year for which figures are available - the firm completed 114,000 connections and had a turnover of £213 million.
Independents say EDF's three regions are the toughest to enter, an opinion that is borne out by its market share of about 96 per cent, according to Steve Wood, the company's head of commercial services, connections.
Wood says slow progress in competition is the result of a combination of factors: brand loyalty to the old local electricity companies EDF now owns, customers who lack knowledge of the competitive options and returns that leave little room for profit because the DNO's charges must reflect costs.
Turkeys voting for Christmas
However, Wood says that "independents have been heard" in the recent price review and that EDF welcomes competition. While some may consider this akin to turkeys voting for Christmas, Wood says EDF stands to gain.
"Market dominance is not all it is cracked up to be," he says. "We have to defend our position, staff are not truly motivated and we would like to be the connector of choice, not dominance."
There is a potentially more commercial benefit on offer too: higher margin. "The price review allows us to earn a regulated margin," says Wood, "but the carrot going forward is that if we pass the competition case - which all DNOs must do by 2013 - we will be allowed to earn unregulated margins."
There is a stick as well as a carrot: should DNOs fail to pass the test, they could be referred to the Competition Commission.
It is that combination of incentive and penalty that could finally effect the kind of market changes that have until now made the market for gas connections far more competitive than that for electricity connections.
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