Background to the Industry
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. The electricity market in Great Britain is entirely privatized and liberalised, meaning that there is full competition between private companies.
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.
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 exist between the British mainland and other regions or countries. This includes connections to 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 some 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 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.