About the Industry
The electricity market in Great Britain is regulated by the Gas and Electricity Markets Authority, operating through the Office of Gas and Electricity Markets (Ofgem). Ofgem’s role is to protect the interest of consumers by promoting competition where appropriate.
Ofgem issues companies with licences to carry out activities in the electricity sector, sets the levels of return which the monopoly networks companies can make, and decides on changes to market rules.
The electricity industry consists of three main parts:
- Generation (making electricity)
- Networks (transporting it from where it is generated to where it is used)
- Supply (selling it to the end consumer)
A few energy companies operate across all three of these areas, while others operate in only one or two.
In March 2001, the Balancing and Settlement Code (BSC), was launched as part of NETA (New Electricity Trading arrangements). ELEXON administers the Code on behalf of the UK electricity industry.
We provide and procure the services needed to implement the code and compare how much electricity generators and suppliers say they will produce or consume with actual volumes. We work out a price for the difference and then transfer funds.
This involves taking 1.25 million meter readings every day and handling £1.5 billion of our customers’ funds each year. Our independence and impartiality ensures that our customers have the confidence that the BSC operates efficiently and accurately.
Generators produce the electricity we use every day. They use different fuels and technologies to do this. There are many companies in the electricity generation sector, from large multinationals operating a diverse generation portfolio to small, family-owned businesses running a single site.
Most electricity is generated ‘in bulk’ at large power stations connected to the national transmission network. However, electricity can also be generated in smaller scale power stations which are connected to the regional distribution networks, some can even be in the home. How many power stations are built and of what type is up to companies to decide on the basis of market signals and government policy on issues such as the environment.
About the Networks
There are two types of electricity network: transmission and distribution. Transmission networks carry electricity long distances around the country at high voltages, while distribution networks operate at lower voltages, taking electricity from the transmission system into homes and businesses.
Electricity networks are regulated monopolies, which means that they are built, owned and maintained by only one company in a particular area. These companies make their money by charging electricity producers and suppliers to use their wires. The regulator sets the maximum amount of revenue which the network companies can earn.
Interconnectors are transmission cables that allow electricity to flow from one country to another. There are interconnectors which exist between the British mainland and Northern Ireland, France, Holland and the Republic of Ireland.
Suppliers buy electricity from generators, traders and power exchanges in the wholesale market and sell it on to end consumers. Any discrepancies between their wholesale purchases and what their customers use are managed through the balancing mechanism. Suppliers operate in a competitive market where customers can choose which supplier provides them with electricity. There are six major suppliers and a number of smaller (often niche) suppliers.
The transmission system throughout Great Britain is operated by National Grid, which is responsible for balancing the system and ensuring that supply of electricity equals demand on a second-by-second basis. Electricity is a ‘just in time’ product, which technology does not yet allow to be stored in large quantities.
The rollout of smart metering is one of the biggest challenges to face the energy industry since privatisation. As an organisation that manages wholesale electricity settlement, ELEXON has a key role to play in helping the industry meet that challenge and ensuring settlement is flexed to realise the benefits that smart brings.