Industry News

• OFGEM reviews gas and electricity connections market

  20 Nov 2008

  An OFGEM review into competition in the gas and electricity connections markets has revealed stark performance differences between the two. Whereas the percentage of new entrants in the gas connection market continues to grow – reaching 58% in 2007-2008 – average market penetration of new entrants in the electricity connections market has remained stagnant at just 8%.
  
  

  Energy industry regulator OFGEM launched the review in order to assess ‘the development of competition and the effectiveness of regulation of service standards’ in the connections market. Last year more than 750,000 new connections were made, at a direct cost of more than £600 million. Customers requiring a new connection to a distribution network must typically choose between three options: Connections can be undertaken by either the incumbent electricity Distribution Network Operator (DNO) or Gas Distribution Network Operator (GDN), an independent distribution licensee – known as Independent Distribution Network Operators (IDNOs) and Independent Gas Transporters (IGTs) – or alternatively an Independent Connections Provider (ICP). This three-tier structure was established ‘with the aim of giving customers access to reasonably priced and good quality connection services’.
  
  

  OFGEM’s review reveals that whilst a strong independent sector is today responsible for delivering more than half of all gas connections, it is the Distribution Network Operators who undertake the vast majority of electricity connections. So why is there such a discrepancy between the two markets?
  
  

  Firstly, it is necessary to acknowledge the fact that both gas and electricity connections cannot be undertaken in isolation: Reliance upon existing network infrastructure means that interaction and co-operation between at least two parties is necessary in order to carry out all service connections. However, a number of factors specific to the electricity connections industry often serve as a deterrent for those seeking a connection from an independent supplier: the obligation of applying for network assessment and design approval from a DNO, for example, means that it is often easier to apply for an electricity connection from a DNO itself, rather than manage the complicated process of interaction between a DNO and an IDNO or ICP. Constraints of this nature are far less apparent in the gas connections industry, which instead benefits from greater transparency and improved communication between GDNs and the independent sector.
  
  

  Furthermore, whilst competing for contestable new connections work, DNOs also have a role to play in providing non-contestable services. Any IDNO or ICP bidding for new connections work is forced to rely on network information, analysis and services provided by the DNO itself. Gas connections, by contrast, are generally not so heavily reliant upon the transfer of network information between a GDN and IGT or ICP in the case of an independent provider supplying the connection. Additionally, whilst independent gas suppliers are able to operate assets immediately once a connection has been installed, independent electricity suppliers must participate in lengthy adoption procedures with the incumbent DNO. This inevitably leads to an increased degree of complexity, as well as extended timescales and a greater risk of poor service for the customer: once again, it can prove far less challenging to seek an electricity connection directly from the DNO.
  
  

  The OFGEM review recognises that ‘competition in gas connections continues to be significantly more developed than in electricity, where there is little evidence of any effective competition and where service standards are relatively poor’. Similar criticism has been reported throughout the construction industry: In 2006, a survey conducted by the National Federation of Builders revealed that 86% of projects were subject to delay as a result of utility companies and, furthermore, that delayed electricity connections resulted in significant financial losses in nearly a third of cases. As such, OFGEM appears determined to monitor and improve competition within the electricity connections market: As part of its initial consultation document for the forthcoming Electricity Distribution Price Control Review (DPCR5), the regulator outlined a number of ‘additional measures’ – including extending licence obligations, introducing time-based financial incentives and potentially enforcing structural separation – which may be introduced in order to develop competition ‘if performance did not improve’.