October 11, 2011 9:30 pm

SSE to shake up electricity market

Scottish and Southern Energy will break ranks with rival utilities by offering its electricity for sale to any household supplier this week, heralding the biggest change for almost a decade in the UK’s electricity market.

The vertically integrated big six energy companies sell most of the electricity they generate directly to consumers – a system under which Ofgem, the regulator, has suggested retail energy prices shoot up like a rocket but fall like a feather. Ed Miliband, the Labour leader, pledged during his party conference speech to “break the dominance of the big energy companies” by forcing them to auction all of their electricity on the open market.

SSE will now do exactly that and auction 100 per cent of its power on the UK’s day-ahead wholesale market as soon as practically possible. It will buy all the electricity required for its customers from the same source. Ian Marchant, chief executive of SSE, told the Financial Times that he expected “one or two” of his competitors among the big six utilities to follow suit by Christmas.

This heralds a vast expansion of the amount of electricity that will be openly traded. At present, the day-ahead market handles only 40 gigawatt/hours per day. The average daily demand volume of SSE alone is 165 GW/hours. Mr Marchant had hoped to begin auctioning all of his electricity as early as Wednesday, but the risk of “swamping the exchange” meant that it will phase in auctioning, starting on Friday.

The big utilities are under intense political pressure, forcing them to consider radical change in order to restore public trust. This change will remove one barrier to entry for new suppliers, which may help push down consumers’ bills through greater competition.

At present, they use their own power stations to generate most of the electricity which they supply to British homes. In effect, only a relatively small surplus is traded on the wholesale market.

Critics have cited this as a prime example of a closed arrangement – a “rigged market” according to Mr Miliband – helping to explain why the big utilities together supply 99 per cent of the energy consumed by British households. Independent supply companies must buy their electricity on a relatively illiquid market. Because most electricity is not openly traded, wholesale prices are not fully transparent.

Ofgem had decided on a partial reform, proposing to force the utilities to auction 20 per cent of their electricity by 2013.

Mr Marchant has decided to go further and faster. He described the move as “one feature” of his company’s effort to restore customer trust. Transparency in wholesale pricing could benefit the utilities because it will allow them to rebut charges of profiteering.

“This is a fundamentally different way of achieving price discovery in the market,” Mr Marchant said. “It demonstrates two things: we’re prepared to listen and we’re prepared to lead. We think this is the right thing to do.”

Mr Marchant acknowledged that it would become easier for small competitors to enter the household supply market. “It should give people more confidence in wholesale prices and a key barrier to entry is confidence in your input costs. It’s not designed to encourage entry, but it will – it removes a barrier,” he said.

SSE aims to auction 25 per cent of its electricity by the end of November and 100 per cent by early next year. Assuming that other companies follow, Mr Marchant said that the new system should be “up and running and embedded before April”.

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