GAS SUPPLY AND DISTRIBUTION - UK - MARCH 2017

GAS SUPPLY AND DISTRIBUTION - UK - MARCH 2017

Apr 2017 Mintel Oil and GasN/A Price :
$ 1236

Ofgem has introduced a new regulatory framework, known as the RIIO model, for the current eight-year price controls for gas transmission and distribution networks, which run from April 2013 to March 2021. Under the new framework, the revenue earned by network operators is strongly linked to incentives, innovation and outputs. The changes mean that companies need to adopt a more long-term approach to infrastructure investment decisions, with increased focus on active asset management over traditional network investment. There is also an increased focus on innovation and new technologies that facilitate the efficient operation of the infrastructure network and provide operational cost savings.

Table of Content

EXECUTIVE SUMMARY
The market
Increased demand for electricity generation drives natural gas demand in 2016, reversing recent downward trend
Demand for gas from the domestic sector strongly influenced by changing weather patterns
Figure 1: Gas consumption by key end use sectors, 2012-16
Capital expenditure in gas transmission and distribution industry up by 5% in 2015/16
Figure 2: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
National Grid Gas Transmission forecasts total capex to more than double between 2013/14 and 2017/18
Market factors
UK increasingly dependent on natural gas imports
Figure 3: UK Gas Supply, 2012-16
Iron Mains Replacement Programme (IMRP) drives replacement expenditure by gas distribution network operators
Rising wholesale costs prompt a number of suppliers to hike prices in early 2017, following price cuts in the previous year
New regulatory framework introduced for current control period
Companies
Transmission and distribution industry structure
Gas supply industry continues to be dominated by ‘big six’ energy firms...
 but independent suppliers are rapidly gaining market share
What we think

KEY INSIGHTS
How does Ofgem’s new regulatory framework - the RIIO model - impact distribution network operators’ approach to infrastructure management and investment?
What are the key challenges faced by the UK’s gas network operators? How are companies innovating to address these challenges?
What are the key recommendations in the CMA’s final report following the energy market inquiry?

INTRODUCTION
Definitions
Methodology
Abbreviations

MARKET POSITIONING
Key points
Overview
Roles of distribution networks
Ofgem regulates gas network operators via price controls
Customers
Suppliers

UK ECONOMY
Overview
Figure 4: UK GDP quarterly development, 2003-16
Figure 5: UK GDP in economic downturns and recoveries since 1979
Inflation
Interest rates
House prices
Figure 6: UK house price changes, 2004-16
Consumer spending
Manufacturing
Figure 7: UK manufacturing, 2014-16
Business investment
Figure 8: UK GFCF 2003-16
Imports
Exports

MARKET FACTORS
Key points
Social factors
Economic factors
The UK’s increased reliance on gas imports
Potential for shale gas extraction
Wholesale gas prices
Figure 9: Average wholesale gas prices, 2002-16
Figure 10: Average wholesale gas prices, 2002-16
Environmental and legislative factors
Climate Change Programme (including Climate Change Levy, Agreement and efficiency measures)
Emissions Trading Scheme
Carbon Plan
Combined Heat and Power
EU Renewables Directives
Climate Change Act 2008
Renewables Obligation (RO)
Feed-In Tariffs (FITs)
The Renewable Heat Incentive
National Emission Ceilings Directive
Carbon Emission Reduction Target (CERT) and Community Energy Saving Programme (CESP)
Energy Company Obligation (ECO)
Reforms to promote increased competition in retail energy market
CMA energy market investigation

UK GAS DEMAND AND SUPPLY
Key points
Overview
UK gas demand in decline
Figure 11: Segmentation of industrial gas consumption, by end use industries, UK, 2011-15
Figure 12: Segmentation of gas consumption, by non-industrial sectors, UK, 2011-15
Figure 13: Segmentation of gas consumption, by non-industrial sectors, 2015
Power generation
Figure 14: Gas supplied for electricity generation, UK, 2012-16
Figure 15: Gas supplied for electricity generation, UK, 2012-16
Interruptible
Industrial
Figure 16: Gas supplied to the industrial sector, UK, 2012-16
Figure 17: Gas supplied to the industrial sector, UK, 2012-16
Commercial
Figure 18: Gas supplied to the UK commercial sector, 2011-15
Figure 19: Gas supplied to the commercial sector, UK, 2011-15
Domestic
Figure 20: Analysis of the development of gas supplied to the UK domestic sector, 2012-16
Figure 21: Gas supplied to the UK domestic sector, 2012-16
Figure 22: UK installed base of central heating systems, by type of fuel, 1970-14
Regional demand
Figure 23: Gas sales and customers by region, Great Britain, 2015
Northern Ireland gas market
Gas supply
Figure 24: Total gas supply, UK, 2012-16
Figure 25: Development of the UK gas supply, 2012-16

GAS TRANSMISSION AND DISTRIBUTION CAPITAL EXPENDITURE
Key points
Capital expenditure
The market 2012-16
Figure 26: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
Figure 27: Total gas transmission capital expenditure, 2011/12-15/16
Figure 28: Total gas distribution capital expenditure, 2011/12-2015/16
Figure 29: Total gas transmission and distribution capital expenditure, 2011/12-2015/16
Replacement expenditure (Repex)
Figure 30: Length of iron gas mains replaced, by distribution network operator, 2011-16
Capital expenditure by individual companies
National Grid Gas
Figure 31: Gas transmission and distribution capital expenditure by National Grid Gas, 20011/12-2015/16
Northern Gas Networks
Figure 32: Gas Distribution Capital Expenditure by Northern Gas Networks, 2011/12-2015/16
Scottish Gas Networks
Figure 33: Gas Distribution Capital Expenditure by Scottish Gas Networks, 2011/12-2015/16
Southern Gas Networks
Figure 34: Gas distribution capital expenditure by Southern Gas Networks, 2011/12-2015/16
Wales and West Utilities
Figure 35: Gas Distribution Capital Expenditure by Wales and West Utilities, 2011/12-2015/16

FORECAST CAPITAL EXPENDITURE
Key points
Overview
Figure 36: Ofgem’s required expansion of the number of properties to alleviate fuel poverty, 2013-21
Innovation at centre of new price control model for gas distribution and transmission network
Transmission network
Figure 37: Capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-21
Figure 38: Annual capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-2021
Distribution network
Figure 39: Controllable cost allowances for gas distribution companies under (RIIO-GD1), 2014-21
Figure 40: Annual capex plans under RIIO-GD1, by GDN, 2014-21
Figure 41: Annual repex plans under RIIO-GD1, by GDN, 2014-21
Figure 42: Forecast total capex and repex during RIIO-GD1, 2013/14-2020/21
Individual companies
Northern Gas Networks
Figure 43: Northern Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 44: Northern Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
Scotland Gas Networks
Figure 45: Scotland Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 46: Scotland Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
Southern Gas Networks
Figure 47: Southern Gas Networks capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 48: Southern Gas Networks capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
Wales and West Utilities (WWU)
Figure 49: WWU capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 50: WWU capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
NGG East of England
Figure 51: NGG East of England capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 52: NGG East of England capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
NGG London
Figure 53: NGG London capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 54: NGG London capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
NGG North West
Figure 55: NGG North West capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 56: NGG North West capex & repex workload, 2014-16 (actual) and 2017-21 (planned)
NGG West Midlands
Figure 57: NGG West Midlands capex & repex, 2014-16 (actual) and 2017-21 (planned)
Figure 58: NGG West Midlands capex & repex workload, 2014-16 (actual) and 2017-21 (planned)

STRUCTURE OF THE GAS DISTRIBUTION INDUSTRY
Key points
Development and structure of the gas industry
Industry structure
Industry development
National Grid Gas sells majority stake in its four UK distribution networks
Figure 59: Structure of the Distribution Network Operators, as of February 2017
Competition in network connections

NATIONAL GRID GAS
National Grid sells its UK gas distribution businesses
National Grid Gas’ Innovation Strategy
Figure 60: Financial analysis of National Grid Gas, 2012-16

NORTHERN GAS NETWORKS
NGN’ Spending Plans
Innovation
Figure 61: Financial analysis of Northern Gas Networks, 2011-16

SCOTLAND GAS NETWORKS
Innovation
Figure 62: Financial analysis of Scotland Gas Networks, 2012-16

SOUTHERN GAS NETWORKS
Figure 63: Financial analysis of Southern Gas Networks, 2012-16

WALES AND WEST UTILITIES
Figure 64: Financial analysis of Wales & West Utilities, 2012-16

GAS SUPPLY INDUSTRY
Key points
Recent retail market and industry developments
Ofgem implemented market reforms in 2014 to promote increased competition and supplier switching
Further market reforms on the way following CMA Energy Market Investigation
Cheaper tariffs available due to falling wholesale costs, cuts to green levies and increased competition
.but a number of suppliers hike prices in early 2017, citing rising wholesale costs and the cost of delivering government policies
Suppliers face criticism from government amid latest price hikes
Breakdown of average gas and electricity bill
Figure 65: Breakdown of average large supplier dual fuel household bill, 2015
Figure 66: Breakdown of average domestic electricity bill, 2015
Figure 67: Breakdown of average domestic gas bill, 2015
Cheap fixed tariffs have become focal point of competition...
A considerable proportion of households remain on more expensive standard variable tariff, but switching rates are on the up
Figure 68: Number of supplier switches in the domestic gas and electricity markets and share of small suppliers, Great Britain, Q1 2011 - Q4 2016
Figure 69: Number of supplier switches in the domestic gas and electricity markets, Great Britain, 2013 – 16
Independent suppliers are rapidly gaining market share
Figure 70: Domestic gas supply market shares in Great Britain, by company 2012-16
Lower prices and differentiation strategies drive growth of independent suppliers
Future rise in wholesale prices could put smaller suppliers at risk
Poor customer service and complaints handling is an industry-wide issue
Smart Meter Roll-out programme
Switching rates in the SME sector also set to increase

CENTRICA/BRITISH GAS TRADING
Recent acquisitions and disposals
Company strategy
Figure 71: Financial analysis of Centrica, 2011-15
Figure 72: Centrica revenue segmental analysis, 2016
British Gas freezes standard energy tariffs until August 2017
Focus on innovative Connected Homes Products
Company review and outlook
Figure 73: Financial analysis of British Gas Trading, 2011-15

EDF ENERGY
Smart metering programme
Recent price cuts and hikes
Intense competition sees EDF Energy lose more customers in 2016
Figure 74: Financial analysis of EDF Energy, 2011-15
Figure 75: EDF Energy revenue segmental analysis, 2015

RWE NPOWER
Price cuts announced in early 2016...
But Npower introduces strong price rises in March 2017
Company strategy and outlook
Figure 76: Financial analysis of Npower, 2011-15
Figure 77: RWE - UK revenue segmental analysis, 201 5

E.ON ENERGY
E.ON cuts gas price in early 2016....
 But announces a price hike in March 2017, the first in more than three years
Company strategy
Figure 78: Financial analysis of E.ON Energy Solutions, 2011-15
Figure 79: E.ON revenue segmental analysis, 2015

SCOTTISHPOWER ENERGY RETAIL
Gas prices cut in early 2016, but dual tariff raised in early 2017
Company strategy & outlook
Figure 80: Financial analysis of ScottishPower Energy Retail, 2011-15
Figure 81: ScottishPower revenue segmental analysis, 2015

SSE
Recent reductions in gas prices for SSE customers
But SSE hikes electricity prices from April 2017
Company strategy and outlook
Figure 82: Financial analysis of SSE, 2012-16
Figure 83: SSE revenue segmental analysis, 2016

ECOTRICITY GROUP
Ecotricity raises energy prices towards the end of 2016
Company strategy
Figure 84: Financial analysis of Ecotricity Group, 2012-16

FIRST UTILITY
Company strategy and outlook
Figure 85: Financial analysis of First Utility, 2011-15

GOOD ENERGY GROUP
Company strategy
Figure 86: Financial analysis of Good Energy Group, 2011-15
Figure 87: Turnover analysis of Good Energy Group, by segment, 2012-15

FUTURE GAS DEMAND
Key points
The market
Consumer Power scenario:
No Progression scenario:
Gone Green scenario:
Slow Progression scenario:
Figure 88: Forecast UK gas demand, 2016-40
Figure 89: Forecast UK gas demand, 2016-40
Figure 90: Forecast gas demand, by sector, 2016-40
Figure 91: Forecast UK gas demand by sector under “slow progression” scenario, 2016-35
Figure 92: Forecast UK gas demand by sector under “gone green” scenario, 2016-35
Figure 93: Forecast UK gas demand by sector under “no progression” scenario, 2016-35
Figure 94: Forecast UK gas demand by sector under “consumer power” scenario, 2016-35
Domestic demand
Home insulation
Smart meters programme
Increased uptake of smart thermostats
Heat pumps
Industrial/commercial demand
Power generation demand
Figure 95: Forecast power generation installed capacity under “slow progression” scenario, by source, 2016-40
Figure 96: Forecast power generation installed capacity under “gone green” scenario, by source, 2016-40
Figure 97: Forecast power generation installed capacity under “no progression” scenario, by source, 2016-40
Figure 98: Forecast power generation installed capacity under “consumer power” scenario, by source, 2016-40
Imports
Figure 99: Existing UK gas import infrastructure, as of November 2016
Figure 100: Proposed UK import projects, as of November 2016
Exports

FURTHER SOURCES & CONTACTS
Trade associations & regulatory bodies
Energy Networks Association
Office of Gas and Electricity Markets (Ofgem)
Office of Gas and Electricity Markets - Scotland (Ofgem Scotland)
Office of Gas and Electricity Markets - Wales (Ofgem Wales)
Society of British Gas Industries
Trade exhibitions
edie2016
Offshore Europe 2017
Trade magazines
Modern Utility Management
Utility Week

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