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UK Electricity Sector Privatisation and its relevance to modern day decarbonisation

Context

The privatisation of the UK electricity generation, transmission, distribution and retail industry in the 1990s serves as a example of what might be constraining the decarbonisation of todays transport, heat, refining and petchem industries, and gives us some ideas for how to bring about accelerated change.


Background.

It seems like a long time ago now. Back in the late 1980s - early 1990s, the UK Electricity production, distribution & sales industry went through a massive change, driven by the Thatcher government and similar economic theology in Europe and USA.


State owned and monopolistic entities, that had served their countries well for decades, were being broken up, in In order to create new markets that would attract and facilitate new business models, new entrants, start ups, and disruptors, all supported by hungry private equity.


Textbooks have been written about this journey and whether or not it was successful from the point of view of the industry employee or the taxpayer. But I want to focus on here is what it did for the nature of culture and change management within these companies.


The process of disaggregating (or "unbundling") the electricity system created competing organisations in each segment of the marketplace. New generators appeared, and customers were free to change their supplier. This in turn created a requirement for new and competitive business models, with suppliers choosing new fuel sources, new generation technology, new website platforms, new pricing approaches etc.


This in turn served to create a competitive work environment. Those employees who could embrace change, think outside the box, and move rapidly were rewarded.


And the net benefit for UKPLC was that, by the early 2000s, the cost of electricity in the wholesale market with close to the break even cost or the short run marginal cost, based upon some of the cheapest fuels in the marketplace such as coal.


This in turn meant that the UK's manufacturing industry had a huge cost advantage compared to our neighbours. This benefit to the UK Economy is often missed in the debate about whether electricity privatisation was a success or not.


The Need for independent private equity in todays stubbornly high fossil carbon industries.


They say that necessity is the mother of all invention. And this proves true in the paragraphs above. As privatisation of the electricity sector spread, as new business models emerged, an additional dimension of competitive pressure and opportunity was also being deployed. This was the need to rapidly decarbonise the electricity generation sector and the resulting NFFO, ROC and CFD regimes.


The combination of the deregulation of the electricity sector and the competitive forces that created, coupled with the government's agenda to decarbonize, resulted in some dramatic changes in the industry structure, as summarised below

  1. Coal fired power stations had to adopt and adapt to cleaner "biomass" fuels and eventually were forced to close

  2. New market entrants switched to burning gas as a cleaner fuel and using combined cycle gas turbines as a more efficient and lower cost form of generation

  3. New and disruptive business models emerged. Combined heat and power plants meant that electricity was being generated almost as a byproduct of industrial heat production.

  4. Power production was being democratised by for example rooftop solar and onshore wind.

  5. New sources of capital from non traditional locations were creeping into the market, especially in the offshore wind sector.

  6. New international energy companies sort out the UK as a target rich environment. Such companies included Enron, Entergy, AES, Cinergy, AEP, EDF, Statkraft, Vattenfall, RWE and Eon.

So why is this relevant to today's broader European industrial decarbonisation agenda?

My casual observation is the Is that other (non electricity) sectors such as transportation, oil refining, and petrochemicals have some how managed to sidestep the decarbonisation agenda, with the result that many of the organisations are performing the same business models as they did 70 years ago. This is compared to an electricity sector that looks nothing like it did 30 years ago. Employees in the carbon heavy sectors have remained safe in their jobs for perhaps 30 years.


The key question then becomes one of how to incentivize the increasingly rapid change in these industries that still need to decarbonize. Whilst these industries may be very proud of their technical prowess, they do seem to lack the rigour of a private equity owner. And a culture of embracing rapid change to remain globally competitive.

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