The “big six” vertically integrated utilities in the UK
The “big six” vertically integrated utilities in the UK have experienced very high margin volatility on since 2001 as commodity prices, most notably gas and power, have moved dramatically. In the long term, the overall effect has been to promote coal generation, despite the introduction of carbon pricing in 2005.
Scope of this title:
* Wholesale pricing trends for UK energy commodities 2001-06
* Spark spread margin analysis for the “big 6″ UK utilities; Centrica, EDF Energy, E.ON UK, SSE, ScottishPower and RWE npower
* Modelled supply volume proportions from coal and non-coal generation assets over 2001-2006
* Analysis into the reasons behind trends in margin volatility over the analysis period
Highlights of this title:
* Transfer pricing issues are critical to the operation of Vertically Integrated (VI) utilities as the retail and generation arms of utilities must each remain competitive in isolation as well as contribute to the overall profitability of the group.
* The relatively low and stable price of coal, in combination with rising power prices over successive years that have been pushed up by marginal gas plant costs, have conspired to deliver utilities with heavy coal exposure substantial spark-spread margins.
* While the introduction of carbon pricing has reduced both dark and spark spreads, gas power plants are still less profitable than coal power plant. Looking retrospectively, a high carbon price would have significantly impacted the profitability of those firms with heavy reliance upon coal power generation.
Reasons to order your copy:
* Understand how the portfolio of the big six utilities has determined their profit margins over the period 2001-06.
* Analyze the impacts that future portfolio movements may have on generation profitability
* Highlight the relative weakness of current carbon prices in incentivising a switch from coal to gas power generation
OUR VIEW
CATALYST
SUMMARY
METHODOLOGY
ANALYSIS
Generation margins are determined by transfer pricing issues and commodity price movements
Generation assets are important cushions against commodity cycles for Vertically Integrated (VI) utilities
Transfer pricing is a key internal decision for utilities as costs and profits are assigned to various business units
This brief models the performance of UK VI generators by using an asset database and historical commodity prices
Coal has been by far the most stable energy commodity in the UK since 2001
The introduction of carbon pricing has done little to close the gap between the dark and spark spreads
The growing dark-spread has seen coal plant become the most profitable thermal plant to operate
SSE changed its generation portfolio through the acquisition of the two coal power plants in 2004
The distinction between coal and gas generation margins has grown since 2001
The purchase by SSE of two coal plants in 2004 has dramatically improved its generation margins
Under the modeling assumptions, coal-heavy generators are likely to have enjoyed greater profitability in 2005/06
While carbon pricing has not made much difference historically, it could yet be an effective mechanism
If the costs of carbon were passed through completely by generators, coal margins would have taken a considerable hit
Centrica is the only major generator to be a net seller of carbon emissions during 2005
A utilitys commitment to coal power production is not enough by itself to explain its usage of carbon emission credits
Once windfall carbon credits are accounted for, the profitability of coal-dominated portfolios returns
A carbon price of £20/tonne, with 2005 exposures, clearly would have promoted gas-heavy portfolios historically