UK Generation Margins 2001-06

Abstract

Introduction

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 report

• 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

Research and analysis highlights

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.

Key reasons to read this report

• 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