Powergen PLC - Company Profile, Information, Business Description, History, Background Information on Powergen PLC

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Company Perspectives:

Powergen's vision is to create one of the world's leading independent electricity and gas businesses. It aims to grow by generating, distributing and supplying power both in the U.K. and other countries in which it operates. As a low-cost, innovative and environmentally responsible operator, it delivers value and quality to its customers, shareholders, employees, partners and communities.

History of Powergen PLC

Powergen PLC is a leading integrated gas and electric company created from the breakup of the nationalized electricity industry in England and Wales. While privatization looms, Powergen is carved out as a separate division of the Central Electricity Generating Board in 1989 and is incorporated as a public limited company with the majority of its shares sold to the public two years later. Powergen and its larger rival at the time, National Power, constitute a virtual duopoly of electricity generation in England and Wales, though that scenario is expected to change as more and more competition enter the industry. Perhaps in response to this inevitable shift in the status quo, the company increasingly becomes involved in allied ventures including forays into international power markets, the provision of combined heat and power, and, most significantly, investment in natural gas.

Commercial Electricity, National Policy, and the Creation of Powergen

Electricity was first harnessed for practical use in the United Kingdom in the late 19th century with the introduction of street lighting in 1881. By 1921, over 480 authorized but independent electricity suppliers had sprung up throughout England and Wales, creating a rather haphazard system operating at different voltages and frequencies. In recognition of the need for a more coherent, interlocking system, the Electricity (Supply) Act of 1926 created a central authority to encourage and facilitate a national transmission system. This objective of a national grid was achieved by the mid-1930s.

The state consolidated its control of the utility with the Electricity Act of 1947, which collapsed the distribution and supply activities of 505 separate bodies into 12 regional Area boards, at the same time assigning generating assets and liabilities to one government-controlled authority. A further Electricity Act in 1957, created a statutory body, the Central Electricity Generating Board (CEGB), which dominated the whole electricity system in England and Wales. Generator of virtually all the electricity in the two countries, the CEGB, as owner and operator of the transmission grid, supplied electricity to the Area boards, which they in turn distributed and sold within their regions.

This situation continued for 30 years, until the government mooted the idea of privatizing the electricity industry in 1987. The proposal was enshrined in the Electricity Act of 1989, and a new organizational scheme was unveiled. The CEGB was splintered into four divisions, destined to become successor companies: Powergen, National Power, Nuclear Electric, and the National Grid Company (NGC). Powergen and National Power were to share between them England and Wales's fossil-fueled power stations; Nuclear Electric was to take over nuclear power stations; and the NGC was to be awarded control of the national electricity distribution system. The 12 Area boards were converted, virtually unchanged, into 12 Regional Electricity Companies (RECs), and these were given joint ownership of the NGC. The RECs' shares were the first to be sold to the public, at the end of 1990. Powergen and National Power's shares were offered for sale the following year.

Powergen before and after Industry Privatization

In order to understand Powergen's role within the electricity industry it is helpful to understand how the system operated until the extensive changes brought on by the Utilities Act of 2000. The provision of electricity consisted of four components: generation, transmission, distribution, and supply. In England and Wales, generation was the province of Powergen, National Power, and Nuclear Electric. Transmission is the transfer of electricity via the national grid, through overhead lines, underground cables, and NGC substations. Distribution was the delivery of electricity from the national grid to local distribution systems operated by the Regional Electricity Companies. Supply, a term distinct from distribution in the electricity industry, refers to the transaction whereby electricity is purchased from the generators and transmitted to customers. Under the terms of its license, Powergen had the right to supply electricity directly to consumers, but in the company's earlier years that right was little exercised. Powergen's usual customers were the RECs, which in turn sold the electricity to the end users.

A new trading market was devised with the privatization scheme for bulk sales of electricity from generators to distributors--the pool. A rather complicated pricing procedure existed in the pool, according to which each generating station offered a quote for each half-hour of the day, based on an elaborate set of criteria including the operating costs of that particular plant, the time of day, the expected demand for electricity, and the available capacity of the station. The NGC arranged these quotes in a merit order and made the decisions regarding when to call each plant into operation. The pool system was not relied upon exclusively, however, the generators frequently made contractual arrangements with distributors for a specified period of time as a means of mutual protection against fluctuations in the pool price.

At the end of 1990, National Power--divided into International Power and Innogy Holdings in 2000--Powergen's bigger rival at the time, boasted an aggregate Declared Net Capacity or Capability (DNC) of 29,486 megawatts (MW), where a megawatt was defined as the generating capacity of a power station in any given half-hour. Powergen, in second place, had 18,764MW DNC. Nuclear Electric's figure was 8,357MW, the National Grid Company controlled 2,088MW, and British Nuclear Fuels PLC, the United Kingdom Atomic Energy Authority, and small independent generators together accounted for about 2,900MW. Another, though limited, source was provided by linkages with the Scottish and French electricity systems, with which import or export deals were sometimes made. Powergen and National Power between them thus controlled some 78 percent of the electricity market in England and Wales, of which about 30 percent was held by Powergen.

Privatization of the utility was designed to promote a beneficial result through the free play of market forces. The introduction of competition in power generation, it was argued, would lead both to greater efficiency within the industry and to lower prices for the consumer. Within a few short years, however, concerns had already arisen, as critics of the scheme had predicted from the start. A duopoly, which at the time of its creation held such a significant majority of the electricity generating market, was never likely to embody the purest form of free market operations.

Government Regulation and the "Dash for Gas"

In 1994 the industry watchdog, the Office of Electricity Regulation (Offer), expressed concern about Powergen and National Power's continuing dominance of the market--and the fact that from June 1990 to January 1994 the wholesale price of electricity had risen by 50 percent. The market share of the big two had in fact declined since privatization, with National Power enjoying some 33 percent and Powergen controlling less than 25 percent, but nonetheless rumors were rife that Offer would refer the duopoly to the Monopolies and Mergers Commission. Offer eventually stopped short of that proceeding, but the regulator did lay strictures on the two generating companies, requiring that they should sell a specified amount of generating plant capacity--in the case of Powergen 2,000MW--and submit to price-capping for a period of two years.

The demand to sell plant capacity was expected to cause little hardship to Powergen; which plant to sell and when to sell was left to the company's discretion, provided it complied with Offer's deadline of December 31, 1995. Much of the plant capacity disposed of was expected to be less-attractive coal-fired plants, some of which Powergen would have closed anyway as the plants were unnecessary to its needs. In preference to an outright sale, it seemed possible that Powergen might be able to arrange an asset exchange with a foreign power company.

The required price caps, ironically, appeared likely to prove a less onerous burden to Powergen and National Power than to the state-owned Nuclear Electric and to small independents, both existing and potential. Nor would the new pricing rules result in lower electricity bills for the average household consumer--only for large corporate customers.

The government, apart from its concerns about fair competition and price, was particularly interested in resolving any controversy or questions regarding Powergen and National Power, as it intended to sell its remaining 40 percent share (which it had retained at privatization) in each of the two companies. The sell-off to the public, scheduled to take place in February 1995, was expected to raise a welcome £4 billion for the government; £1.5 billion of which would be attributable to Powergen.

Powergen followed the usual route of privatized companies in the United Kingdom by undertaking a rigorous program of cost-cutting, achieved primarily through improved efficiency, staff reductions, and plant closures. Employee redundancies had been dramatic: Powergen's staff as of 1994 was less than half its 1990 level. Several power stations were closed outright, while others were put into indefinite reserve. The strategy proved a successful one, with the company's profits healthy despite a reduction in sales.

In preparation for privatization, plans were laid to reorganize and modernize power generation, and during the 1990s the face of the industry accordingly changed. From a heavy reliance on coal-fired plants, Powergen, like its rival National Power, began moving to a more diversified base. As of 1994 coal was still the dominant source--figures for 1993 to 1994 proved that Powergen still relied very heavily on the resource, with coal accounting for a hefty 80.6 percent of total fuel used. Increasingly, coal was imported from abroad, as the foreign variety had a lower sulphur content than its British counterpart, obviating the need to fit special emission-reducing equipment to comply with environmental standards.

An emerging trend was toward combined cycle gas turbine (CCGT) plants--the so-called "dash for gas." Excess generating capacity in the 1980s made some coal-fired capability redundant, and more was jettisoned in favor of natural gas, the use of which had both economic and environmental advantages. The use of gas, while relatively small at 10.6 percent, should be compared to 1992 to 1993 figures, when gas accounted for only 3.6 percent. And clearly, Powergen believed the future was in natural gas. Since privatization the company invested in some 3,000MW of new CCGT plant capacity, generated by three power stations: Killingholme, in South Humberside (completing its first full year of operations in 1993 to 1994); Rye House, Hertfordshire (finished in 1993); and Connah's Quay, in North Wales, which was expected to provide over half the electricity needs of Wales.

Thus a part of Powergen's long-term plan was to broaden its interests in natural gas. As early as 1989, with privatization on the horizon but not yet effected, Powergen, in a joint venture with Conoco UK Ltd., set up a gas trading company, Kinetica, to market gas downstream and construct gas transport pipelines. The venture became a clear success for Powergen, and the company was confident that there would be ample scope for further development. The subsidiary Powergen (North Sea) Ltd. constituted an investment for the company's future business. In 1993, Powergen acquired from Monument Oil and Gas PLC a 3.9 percent stake in the Liverpool Bay development. This would supply gas to Powergen's own Connah's Quay power station. Further widening its scope, Powergen purchased in 1994 from a subsidiary of Lasmo an additional 5 percent of Liverpool Bay and a 12 percent interest in the Ravenspurn North field as well as a 3.75 percent stake in Johnston field, both located in the Southern Gas Basin of the North Sea.

Opportunities Abroad and Vertical Alignment

After becoming a PLC, Powergen increasingly looked abroad for opportunities and advancement. In 1993 to 1994 the company undertook, as a member of a consortium with two U.S. companies--NRG Energy, Inc. and Morrison Knudson Co., Inc.--to operate lignite mining and power generation in the Leipzig region of Germany. As a future investment in the area, and again in cooperation with NRG Energy, the company bought a 400MW share in the 900MW Schkopau power station. At Tapada do Outeiro in Portugal, Powergen became a member of a consortium charged to build and operate a 900MW CCGT power station.

Powergen began moving into the field of combined heat and power generation through its subsidiary Powergen CHP. Its first project in this area, initiated in 1993 to 1994, was a 14MW co-generation plant commissioned by SmithKline Beecham. The subsidiary has also undertaken to provide energy for three paper mills in Kent.

Powergen's sorties into ventures, related to but independent of its primary function as a U.K. power generator, were necessary for the company to grow. Its share of the home electricity market was undeniably dwindling, from a post-privatization inheritance of 30 percent to some 24.5 percent in 1994; and Nuclear Electric had edged out Powergen as the second largest power generator. Powergen's market share was expected to sink yet further as the government's plan to increase competition in power generation came to fruition. Nonetheless, it seemed likely that Powergen would continue to control a significant proportion of the industry.

The government sold its remaining 40 percent stock in Powergen in February 1995. The following year, the government rejected Powergen's bid to acquire Midlands Electricity PLC (MEB), which would have marked the first merger between a U.K. power generator and distributor. The government believed the merger would cause reduced competition and higher prices, ultimately operating against public interest.

Rebounding from the disappointment, Powergen entered into a new joint venture with Siemens in 1997, the development of the Cottam Development Centre, which went on to win a 1997 Strategic Partnership Industry All-Star Award. This collaboration wasn't the first between the two companies; they had worked together on other large-scale projects, including construction of the Killingholme station on South Humberside in 1993. The Cottam project would become a showcase for the latest design of high-efficient, environmentally mindful gas turbines, providing a solid platform for large-scale development ventures well into the future.

In July 1998, Powergen purchased East Midlands Electricity for £1.9 billion. This marked the company's entrance into the residential and smaller business electricity markets and allowed the distribution of electricity over a region of 16,000 square miles and 67,000 kilometers of overhead lines and underground cables. The following year, Powergen became the first U.K. company to sell electricity and gas to domestic customers via the Internet.

The New Millennium Brings Industry Changes

The year 2000 marked the beginning of a period of dramatic change for both the U.K. electricity industry and for Powergen as the company moved to reposition itself for the lucrative U.S. energy market. The company moved to acquired LG&E, a Kentucky energy service provider, for US$3.2 billion. But in order to make this happen, Powergen sold its Australian, Indian and other Asian assets, as well as three plants, including Cottam, which went as part of a £1.5 billion auction sponsored by Goldman Sachs.

In July 2000, the ACT Legislative Assembly created the Utilities Act, which was to commence on January 1, 2001. The Act instituted a new regulatory structure for electricity, gas, water and sewage utilities in the United Kingdom. A single energy regulator, the Gas and Electric Markets Authority, was established in November, and the offices for gas and electricity regulation were merged to form the Office of Gas and Electricity Markets (OFGEM). The biggest change brought on by the Act was the separation of distribution and supply, but another important component was the implementation of the New Electricity Trading Arrangements (NETA). Powergen took a positive tack, announcing that, "with our flexible generation, growing customer base and integrated trading strategy, NETA represents a business opportunity rather than a threat." The company went on to seal the LG&E deal in December, just four months before German company E.ON announced a preconditional offer to purchase Powergen.

The German utility giant's offer valued Powergen's share capital at roughly £5.1 billion. The acquisition was completed in July 2002, when Powergen became part of the world's largest investor-owned electricity and gas utility. It also found itself better positioned to achieve long-held ambitions in the United States and the United Kingdom. The Powergen board unanimously recommended the sale.

Principal Subsidiaries:Corby Power Limited (50%); East Midlands Electricity; LG&E Energy Corp. (US).

Principal Competitors:Centrica; Scottish Power; TXU Europe.


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