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

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History of PowerGen PLC

PowerGen PLC is the smaller of the two electricity generating companies created from the breakup of the nationalized electricity industry in England and Wales. Carved out as a separate division of the Central Electricity Generating Board in 1989 while privatization loomed, PowerGen was incorporated as a public limited company in 1989 and the majority of its shares were sold to the public two years later. PowerGen and its larger rival, National Power, constituted a virtual duopoly of electricity generation in England and Wales, though that scenario was expected to change as more and more competition entered the industry. Perhaps in response to this inevitable shift in the status quo, the company increasingly became involved in allied ventures including forays into international power markets, the provision of combined heat and power, and, most significantly, investment in natural gas.

Electricity was first harnessed for practical use in the United Kingdom in the late nineteenth 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 of the 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 on 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.

In order to understand PowerGen's role within the electricity industry it is helpful to understand how the system operates. The provision of electricity consists of four components: generation, transmission, distribution, and supply. In England and Wales, generation is 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 is 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 licence, PowerGen has the right to supply electricity directly to consumers, but to date that right has been relatively little exercised. PowerGen's usual customers are the RECs, which in turn sell 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 exists in the pool, according to which each generating station offers 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 arranges these quotes in a merit order and makes the decisions regarding which plant to call into operation when. The pool system is not relied upon exclusively, however, as the generators frequently make contractual arrangements with distributors for a specified period of time as a means of mutual protection against fluctuations in the pool price.

To view PowerGen's overall position in the industry, it is necessary to recognize its comparative status just prior to privatization, at the end of 1990. National Power, its bigger rival, 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.

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; it was left to the company's discretion, provided it complied with Offer's deadline of December 31, 1995, which plant to sell and when. 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 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 has 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 have 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 the preparations 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 1993-1994 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 plants (CCGT)--the so-called "dash for gas." Excess generating capacity in the 1980s made redundant some coal-fired capability, 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 1992-1993 figures, when gas accounted for only 3.6 percent. And clearly, PowerGen believed the future was in natural gas. Since privatization the company has invested in some 3,000MW of new CCGT plant capacity, generated by three power stations: Killingholme, in Humberside (completing its first full year of operations in 1993-1994); Rye House, Hertfordshire (finished in 1993); and Connah's Quay, in North Wales. The last-named, begun in 1993 and scheduled for completion in 1996, 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.

Since becoming a PLC, PowerGen has increasingly looked abroad for opportunities and advancement. In 1993-1994 the company undertook, as a member of a consortium with two U.S. companies--NRG Energy, Inc. and Morrison Knudson Co., Inc.&mdashø 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, under construction in 1994. At Tapada do Outeiro in Portugal, PowerGen became a member of a consortium charged to build and operate a 900MW CCGT power station. Although as yet a relatively small player on the international stage, PowerGen International aimed for growing participation in energy projects worldwide.

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 1993-1994, was a 14MW co-generation plant commissioned by SmithKline Beecham. The subsidiary has also undertaken to provide energy for three paper mills in Kent. Small beginnings as yet, but PowerGen planned to explore other opportunities of a similar nature.

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; Nuclear Electric has 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. This, together with the company's increasing investment in natural gas, combined heat and power opportunities, and international projects, should secure PowerGen a comfortable and continuing niche in the energy industry for the foreseeable future.

Principal Subsidiaries: Kinetica Ltd. (49.99 percent); PowerGen CHP Ltd.; PowerGen (North Sea) Ltd.; Saale Energie GmbH (Germany; 50 percent).

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Further Reference

Butler, Daniel, "Power at Play," Management Today, November 1990, pp. 54--59."Customers Set to Benefit by up to £500m," Financial Times, February 12, 1994."Electricity Generator May Swap Assets," Financial Times, June 10, 1994."Electricity Generators to Escape Monopolies Reference," Financial Times, February 11, 1994."The Generation Game," Economist, September 1, 1990, p. 29."Generators in Deal to Sell Plant and Reduce Prices," Financial Times, February 12, 1994."Generators Stake to Be Sold for £4bn," London Times, March 5, 1994."Government Announces Last of PowerGen Sell-Off," Birmingham Post, March 5, 1994."The Lex Column: Cash Power," Financial Times, June 10, 1994.Main Prospectus: National Power PLC, PowerGen PLC, offers for sale by Kleinwort Benson Limited on behalf of the Secretary of State for Energy, 1991."Offer Proves a Party-Pooper for High-Flying Generators," Independent, January 5, 1994."PowerGen," London Times, November 16, 1994, p. 28."Power Generators Meet Offer to Head Off MMC Enquiry," London Times, January 24, 1994."PowerGen Looks for Role in Offshore Gas," Lloyds List, December 29, 1993."PowerGen Sees Live Chances on Overseas Circuit," Evening Standard, January 21, 1994."PowerGen Strengthens Gas Interests," Birmingham Post, December 12, 1993."Power Sell-off in February," London Times, September 30, 1994, p. 21."Special Report on Competitive Power," Daily Telegraph, March 11, 1994.Tieman, Ross, "Powerful 27 Percent Payout from PowerGen," London Times, November 16, 1994, p. 26.

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