False incentives generated by the the regulatory regime for the UK gas and electricity industries have caused many gas-fired power stations built in the 1990s to be located in socially undesirable locations.

The new report, by University of Warwick economics Professor, Michael Waterson with Maria Vagliasindi, argues that this is caused in part by the ways in which the regulatory regimes for transmission charges have developed in the UK gas and electricity industries. These created false incentives for new plants to locate nearer to points of major demand - London, Birmingham, Manchester, etc. - and further from the coast than would be the case if social concerns were primary.

Since the privatisation of electricity in 1990, more than 40 new plants have been opened or commissioned. The new Combined Cycle Gas Turbine (CCGT) power stations by themselves, all introduced in the last decade, constitute over 50% of the 1990 stock of generation capacity.

CCGT plants are much more flexible in their locational possibilities than coal-fired plants, which are limited by the high cost of transporting coal, environmental impact and the demands for cooling water. Yet no overall consensus has emerged on the positioning of CCGT plants. Some are convenient for the North Sea gas intake points; others are on the edge of populous areas; others still are in between.

Despite both gas and electricity transmission ostensibly having ‘price-cap’ regimes, features of the charging formula in gas transmission gives incentives to the gas supplier to boost volume throughput, while the formula for electricity transmission gives incentives to reduce transmission activities or at least to smooth them. Thus, both companies’ interests are served if generators can be persuaded to locate so as to minimise demands on the National Grid.

The evidence is consistent with the proposition that growth in the transmission of energy is much more rapid in gas than electricity. Thus, it suggests that plant locations would not be optimal from the viewpoint of society generally. Since the regulatory structure is changing to joint regulation of energy, we may expect some conformity to develop in the formulae operated for gas and electricity generation. This will be socially beneficial for new plant location, but will adversely affect some existing operators.

NOTES

The full report is entitled ‘Power to the People? An Examination of the Regulatory Factors Potentially Influencing the Location of New Generation Capacity’ was funded by the Economic and Social Research Council (ESRC). Waterson is Professor of Economics at the University of Warwick; Vagliasindi is at the University of Edinburgh.

For further details contact:
Professor Michael Waterson  01203 523427
Peter Dunn Press Officer  01203 523708

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