The UK Energy Generation Industry - Literature review Example

The UK Energy Generation Industry The UK Energy Generation Industry Introduction Energy generation sector is a very essential product and service industry in the UK and its economy. It utilizes a number of diversified technologies ranging from the mature steam turbines, pioneering marine current turbines, wind turbines, nuclear power generation (Stephen, 2006, pp. 16), to massive petroleum and oil extraction for the generation of huge amounts of energy. In the UK, energy describes both energy and electric power production, importation, exportation, as well as consumption within the United Kingdom. The UK’s energy policies thereby describe the politics of the United Kingdom in relations to the energy production in broader sense. For instance, successive governments in the UK have always outlined several commitments to reduce carbon dioxide emissions and other pollutants (The Community Energy SavingProgramme (CESP), 2009). One such announcements was the July 2009 “Low Carbon Transition Plan” launched by the ministry of Brown, which aimed at generating about 30% of electricity from renewable sources, 40% from low carbon-content fuels, and the remaining percentage from any other non-polluting energy sources by 2020 (Committee on Climate Change 2008). The UK’s energy consumption stood at about 3,252 kilograms of oil-equivalent per capita by 2010, as opposed to the world’s average of approximately 1,852 kg. In the year 2012, the total amount of electricity consumed was an oil equivalent of 27,305 kilograms while the demand for electricity was on an average of 35.8 GW, then 57.5 GW at its peak. However, owing to the 1990s privatizations of energy companies, the central objective of the industry has been “to maximize profitability for the shareholders.” Even though, ethical and corporate issues such as health and safety, as well as sustainability and fuel poverty have increasingly been of great importance within the corporate agenda. Considering the energy industry as a purely business sector, this paper thereby gives a closed analysis of the industry’s performance, and elaborates the corporate performance by drawing from one of the UK’s most productive energy company- EDF Energy. Industrial Structure The industry of energy generation is usually split into four phases or processes, including electricity or gas generation such as gas and power stations, gas or electric power transmission, gas and electricity distribution, and finally, electricity and gas retailing (DECC 2013). In a number of countries, energy distribution companies commonly own the entire infrastructure, from generation stations, to transmission, and finally to distribution infrastructure. As a result, the energy generation industry, especially the electricity generation and distribution is commonly perceived as a natural monopoly. The industry is often heavily regulated by price control forces, and in some cases, government-owned or operated. The state and nature of market reforms of the “electricity market” always determine whether electric companies are capable of involving in just a number of these processes minus necessarily owning the entire infrastructure, or consumers choose what components of the infrastructure to patronize (OPSI 2007). In nations where the provision of electricity is deregulated, the end-users of electricity might opt for the costly green electricity (Vaughan 2012, pp. 9). Market Overview Local or domestic energy supply across homes within the United Kingdom encompasses three key elements including energy generation, conveyance (transmission), and retailing (distribution and supply). These three basic elements can be simplified as generation of energy in form of electricity or gas, transporting the energy generated (electricity or gas), and selling it to the consumers or customers. Some energy companies can operate on any of these areas while others can operate in all the three segments. Noteworthy, most of the UK’s electricity and gas markets are privatized, meaning that private companies ensure that consumers get the energy they demand, and that customers are able to choose the companies to supply them with the energy (Strange 1997, pp. 128). According to Hughes (1983, pp. 84), most energy or power generated at large power stations is tapped or connected to the main national transmission grid or network. As well, electricity can be generated in small-scale power stations, which are then tapped to the regional distribution networks (Hughes 1983, pp. 86). The type and number of power stations constructed is the decision of every individual company based on market signals, but all regulated by the government policies on issues pertaining to the environment (The Community Energy Saving Programme 2009). In the United Kingdom’s energy generation sector, there are several companies, from small family-owned companies or businesses running a single or few sites, to large multinational power companies. Generally, there are two forms of electricity networks: transmission and distribution. Hughes (1983, pp. 92) reveals that while distribution networks run at low voltages, conveying electricity from the transmission grids into businesses and homes, transmission networks convey or carry electricity around the UK through long distances at high voltages. The National Transmission Grid, responsible for the system’s balancing and ensuring that power supply meets the consumer demands at any time (Strange 1997, pp. 116), runs the transmission systems. The same system and infrastructure exists for the transmission and distribution of gas. Logically, the UK suppliers buy energy and gas from the market wholesale and sell it to consumers. They operate within a competitive market, within which the consumers are at a position of choosing a regular supplier at their own discretion, in order to provide electricity and gas (DECC 2013). The Electricity and Gas Markets Authority, which operates via the office of “Ofgem” (Office of Gas and Electricity Markets), regulate both the gas and electricity markets. The central role of Ofgem is to protect the consumers’ interest through promoting a positive competition where and when necessary. As well, Ofgem issues licenses to companies in order to operate or participate in activities within the electricity and gas sectors. It also sets the levels of returns that companies and monopoly networks can make, and makes decisions on the charges that a company or an individual may be subjected to for violating the market rules. EDF Energy EDF Energy is a cohesive energy company within the UK, operating from the generation of electricity to selling of electricity and gas to businesses and homes. EDF energy is one of the UK’s largest supplier of energy and producer of the green-electricity (low-carbon electricity) (Committee on Climate Change 2008). It generates approximately 1/5 of the United Kingdom’s electricity. The company is part of the EDF group, which is the world’s leading electricity company that began investing in the UK as early as 1998. Today, EDF Company employs more than fifteen thousand people; from Torness- Scotland, down to Exeter- Southern England, and supplies gas and electricity to over 5.5 million customers (consumer accounts) throughout the United Kingdom, making it the biggest supplier by volume within the UK. More than a quarter of the UK’s population benefit from EDF Energy’s power and gas supply. Within the EDF Energy, there are two distinct businesses: the business that involves in the production of electricity- generation business, and the other one that buys electricity and gas from energy wholesalers and sells it to the consumers- retail business or customer supply business. The generation business operates several power stations, producing electricity that goes directly to the National Grid Systems, which transmits the power throughout the UK. The gas infrastructure operates the same way by using pipelines. Noteworthy, the EDF Energy Company does not produce gas, but actually buy it from the wholesale market in order to sell it to the consumers. The two products (both gas and electricity) thereby bring together the energy supply companies, hence availing the electricity and gas to the needy consumers (Strange1997, pp.121). Besides its insufficient power generation firms, EDF Energy buys and sells both gas and electricity in advance to ensure that it meets the consumer demands. All the gas supplied come from the wholesale market, and as well, a significant portion of the supplied electricity also come from the wholesale market (OPSI 2009). All the company’s business customers fall into two separate categories: large-scale businesses, and small and medium-size businesses or enterprises (SMEs). With residential customers, the SME consumers are offered a range of tariff and contract choices while the large-scale business consumers usually negotiate their consumption contracts on an individual basis (DECC, 2014). However, the Ofgem (Office of Gas and Electricity Markets) is the only independent regulator of the gas and electricity industry. The office is responsible for the protection of consumer interests, including promotion of sustainable and secure supply, as well as supervision and development of markets and competitions. EDF Energy governance is under the control of two teams: the Board of Directors and the Executive Team. The overriding objectives or goals of the ‘Board of Directors’ is to provide a framework of management, within which the EDF Energy Company operates to the highest standards health and safety, as well as ethical concerns. The board also ensure that that company’s investments are enhanced and preserved. Evidently, this has been witnessed through the company’s efforts towards a culture of zero harm and zero tolerance to fraud and bribery. The Board serves to provide appropriate stewardship of the EDF Energy Company, providing vision and leadership that supervises the business management in order to grow a value or sense of responsibility in a sustainable way. This ensures that EDF Energy’s statutory and fiscal obligations are achieved, and that the value of shareholders is enhanced and preserved. On the other hand, the Executive Team (under the leadership of CEO- Chief Executive Officer), operates under the Board’s authority. The Executive Team’s central role is to manage and direct all matters relating to the company’s daily operations for decision making and approval. These matters are exclusive of those that have been reserved by the Board of Directors. Government Influence Successive regimes in the UK have always outlined several commitments to reduce carbon dioxide emissions and other pollutants. An example of such announcements was the July 2009 “Low Carbon Transition Plan” launched by the ministry of Brown (Department for Transport (DFT), 2009), which aimed at generating about 30% of electricity from renewable sources, 40% from low carbon-content fuels (HM Government 2009), and the remaining percentage from any other non-polluting energy sources by 2020. The government’s commitments to moderate the emissions are in order to work against the economic crisis back-drop across Europe. Europe’s electricity consumption significantly shrank by about 5% during the European financial crises, also with a noticeable decline within the primary production. Subsequently, the UK’s trade deficit declined by 8% as a result of the substantial cuts on energy importation. As a result, between 2007 and 2012, Britain’s peak electric power demand fell from 61.7GW to 57.6GW (Strange 1997, pp. 118). Government policies thereby play a very significant role in the limitation of greenhouse gas emissions while striving to meet the energy demands (EU Parliament and EU Council 2001). Alternatively, technological developments alongside the shifting availability of resources also may also lead to various changes in the country’s energy mix via cost changes. By 2010, the UK was ranked at position nine globally on the Environmental Performance Index, which is the measure of how well a country formulates and implements its environmental policies. The UK government is always committed to sustainable developments, meaning involvement in making the necessary decisions on how to realize the vision of stimulating economic growth, tackling economic deficits, as well as maximizing the environmental protection and well-being without impacting the ability of future generations of doing the same. The government thereby takes account of the sustainable development as part of developing the energy generation policies, running the production or generation operations, and retail of the energy products. The UK government thereby formed various departments responsible for making policies, which aid the sustainable development. For instance, the Department of Environment, Food, Rural Affairs (Defra) has the responsibility of overseeing the UK’s sustainable development via the central government. As well, the departments ensure that every departmental business plan contain actions that positively contribute to the anticipated sustainable development. For instance, the 2012 and 2013 businesses were the first to incorporate this. Additionally, the departments came up with a program “greening government commitments,” which are targets or objectives by the central government departments alongside their agencies, set to diminish significantly the levels or amounts of energy wastes, carbon emissions, and water usage (HM Government 2009). These commitments are centrally channelled towards the reduction of the impact on the natural environment while improving efficiency. Taking factors such as “energy consumption” into consideration means a suitable procurement, which aids the environmental protection and conservation programs, as well as reduction of risks of exposure future rise in energy costs. A good example the government’s relentless effort to reduce carbon emissions to the environment between 2009 and 2012, helped save the taxpayer an estimate cost of £45 million on fuel bills. The above government sustainability policies have been the central regulators of every production company’s business plans (The Community Energy Saving Programme 2009). This is due to the fact that the policies aim at enhancing the most cost effective, reliable safe methods of energy production. Reduced costs of production thereby mean profit to the energy generation and supply companies. Impacts of the Energy Generation Industry on the Economy of England and Scotland Energy generation industry has the power of balancing the long-term economic influences by offering energy security, affordability, as well as de-carbonization within the United Kingdom (DECC 2009). In the face of regulating energy prices, political debates on climate changes, and long-term competitiveness, the industry has been at the top, demonstrating the value of its economic contributions to the society through responsible use of energy utility bills (HMGO and HM Treasury 2009). In the UK, the EDF Energy and SSE alongside other renowned energy generation companies generate a diverse range of other social, economic, as well as environmental impacts, which are commonly channelled towards sustainable developments. SSE is a British-Irish energy generation and supply company, with its headquarters in Scotland. The entire energy generation industry has been at the peak of UK’s economy regulation through securing affordable electricity and gas supply, enhancing technical capability and skills within the nation’s workforce, and helping the UK in attaining its renewable energy targets (EU Parliament and EU Council 2003). In both England and Scotland, the EDF Energy and SSE companies have significantly contributed to the increase in GDP and employment over the past five years. The increase in GDP and employment has been as a result of regular supply of energy products and services, as well as wages spent by the several employees and suppliers of energy companies. This is commonly referred to as “induced economic contribution.” The energy industry creates employment opportunities to over 0.2 million employees who receive their wages and use it indirectly towards the country’s economic benefit. By 2013, EDF Energy and SSE alone employed over 45 thousand employees in the UK. The employment criteria is fair enough and spread throughout the United Kingdom, with over 55% of staff based within England, about 30% in Scotland, and the remaining percentage shared between Northern Ireland and Wales. In the 2013 fiscal year, EDF Energy together with SSE’s direct contributions to the national GDP amounted to about £5.5 billion, an equivalent of approximately 35% of electricity, steam, gas, and air conditioning sectors. Over the past 5 years, economic statistics reveal the contribution of the energy industry to the UK’s economy as: (i) 3.5% GDP in 2012 (with gas and oil extraction accounting for 46%, and electricity 28% of the energy total), (ii) 10.2% of the 2010’s total investment, (iii) 51.9% of 2010 industrial investment, (iv) about 2.0% of the annual business expenditure on research and development by 2011, and (v) over 175,000 people employed directly with the sector of energy production and supply by 2012. However, records also show that other approximation of about 30,000 people were also employed indirectly within the energy generation sector. This was an estimate of about 8% of the UK’s total industrial employment. As a company within the energy generation and supply industry, SSE’s contributions to the Scottish GDP in the fiscal years 2012 and 2013 was greatly driven by GVA generated by itself. GVA (Gross Value Added) is a measure of value generated by a given economy, representing the difference between the value of “goods and services sold” and “goods and services used” as a function of their production input (The Oil Crunch 2010). It is thereby estimated that SSE’s chains of supply contributed about £470 million to the Scottish GDP. Reflection Energy generation sector is an essential service industry that utilizes a range of technologies that range from mature steam turbines to the pioneering marine current turbine. Like any other business, the energy generation industry operates under various corporate regulations. From my understanding, the energy generation industry is made up of three basic segments, including generation, transmission, and retail and supply. The generation segment deals with the production of energy from the naturally existing sources of man-made sources. Energy generation firms may operate on resources or materials such as wind energy, nuclear reactions, oil and fossils, as well as renewable sources that are ecologically friendly (Faber 2009). From the production or production firms, energy is tapped to the main or national grid for transmission. The transmission segment encompasses the conveyance of energy at higher voltages towards the user end. Energy is then converted or stepped down to lower voltages for domestic and commercial consumption. This is thereby regarded as the supply and retail segment. Most of gas and electricity suppliers may not necessarily be the producers of such products they operate on. Some companies simply buy the gas or energy from the retail market, and makes it available to meet the demand of consumers. For instance, the EDF Energy Company does not involve in the production or extraction of gases, but they buys the gas from the retail market and sell it to the needy consumers. As usual, every production company must be emitting some waste products, either to the surrounding environment or to the space. This might expose the public to various forms of risks due to contamination or toxication of the human surrounding. For instance, energy production or generation plants relying on oil or fossils as their raw input, release lots of carbon gases such as carbon dioxide to the atmosphere (The Oil Crunch 2010). Excessive accumulation of these waste gases in the space may eat up or deplete the protective ozone layer, resulting into massive global warming. Such global concerns have thereby attracted the attention of governments to involve into the production businesses in order to regulate the emissions of wastes from the production companies. The government must thereby come up with environmental regulation or policies upon which the companies rely. For instance, the UK government has been at the forefront upholding its policies on sustainable developments, which centrally target the environmental conservation for the generations to come. The UK’s energy policies thereby describe the politics of the United Kingdom in relations to the energy production in broader sense. For instance, successive governments in the UK have always outlined several commitments to reduce carbon dioxide emissions and other pollutants (EU Parliament and EU Council 2001). One such announcements was the July 2009 “Low Carbon Transition Plan” launched by the ministry of Brown, which aimed at generating about 30% of electricity from renewable sources, 40% from low carbon-content fuels (Department for Transport, 2009), and the remaining percentage from any other non-polluting energy sources by 2020. As a business, two teams who ensure the smooth flow and success of activities govern energy generation companies: the Board of Directors and the Executive Team. The overriding objectives or goals of the ‘Board of Directors’ is to provide a framework of management, within which the business operates to the highest standards health and safety, as well as ethical concerns. The board also ensure that that company’s investments are enhanced and preserved. The Board serves to provide appropriate stewardship for their respective companies, providing vision and leadership that supervises the business management in order to grow a value or sense of responsibility in a sustainable way. On the other hand, the Executive Team (under the leadership of CEO operates under the Board’s authority. The Executive Team’s central role is to manage and direct all matters relating to the company’s daily operations for decision-making and approval. All forms or energy generation have got either long-term and short-term impacts, or positive and negative aspects. Technology will thereby eventually declare the best or most preferred forms; however, in the market economy, options with less or low overall costs will generally be chosen or preferred over other sources (The Oil Crunch, 2010). Yet, it is unclear which form can best fulfil the necessary energy demands, or which process can be best in solving the energy demands. Therefore, there are indications that distributed generation and renewable energy are becoming more viable and reliable in economic terms (Faber, 2009). Directly or indirectly, the activities undertaken by the industry of energy generation have had influences or several impacts on the UK’s economy. According to DECC (2009), energy generation industry has the power of balancing the long-term economic influences by offering energy security, affordability, as well as de-carbonization within the United Kingdom. In the face of regulating energy prices, political debates on climate changes, and long-term competitiveness, the industry has been at the top (HMGO and HM Treasury 2009), demonstrating the value of its economic contributions to the society through responsible use of energy utility bills. The entire energy generation industry has been at the peak of UK’s economy regulation through securing affordable electricity and gas supply, enhancing technical capability and skills within the nation’s workforce, and helping the UK in achieving its renewable energy targets (DECC, 2013). In both England and Scotland, the EDF Energy and SSE companies have significantly contributed to the increase in GDP and employment over the past five years. The increase in GDP and employment has been as a result of regular supply of energy products and services, as well as wages spent by the several employees and suppliers of energy companies. The energy industry alone creates employment opportunities to over 0.2 million employees who receive their wages and use it indirectly towards the country’s economic benefit. For instance, in the 2013 fiscal year, EDF Energy together with SSE’s direct contributions to the national GDP amounted to about £5.5 billion, an equivalent of approximately 35% of electricity, steam, gas, and air conditioning sectors. References Committee on Climate Change (CCC) (2008). Building a low-carbon economy – The UK’s contribution to tackling climate change. The First Report of the Committee on Climate Change, December 2008. The Stationary Office (TSO), Norwich. Available at: http://www.theccc.org.uk/ DECC (2009). Energy security: A national challenge in a changing world. Report by Malcolm WicksMP.DECC,London.Availableat: www.decc.gov.uk/en/content/cms/what_we_do/change_energy/int_energy/security/securi ty.aspx DECC(2013).Smart metering for electricity and gas. 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