Competition in gas and electricity connections is now producing results that benefit developers and therefore the UK economy as a whole. Over 50 per cent of all new gas connections are made by independent organisations (rather than regional “host” gas network operators). This reflects the impact of early regulation to encourage new entrants to gas connections and network ownership. By and large this area has matured and independents thrive.
Approaching 10 per cent of new electricity connections are made by independents. Ofgem has long aspired to encourage competition here but only since the 2010 price have the incentives been sufficient to stimulate the market. The introduction of a requirement for distribution network operators (DNOs) to demonstrate they are facilitating competition in their region, coupled with the threat of a Competition Commission referral for failure, is beginning to make in-roads and the proportion of electricity connections by independents is set to increase.
In water, the position is less positive. “Self-lay,” as it is termed, is permitted but due to little regulatory incentive the extent of competition in water connections is patchy. It is largely dependent on the enthusiasm of the regional host water company – typically more positive in the north of England than in the south. Ofwat’s competition focus has been on the development of retail and wholesale models and therefore connections has taken a lower priority.
As well as the host network companies, there are currently 11 independent gas transporters (IGTs) and independent DNOs (IDNOs) and, on paper, over 200 registered Independent Connections Providers (ICPs) in electricity and Utility Infrastructure Providers (UIPs) in gas. In practice the number of active competing ICP/UIPs can be no more than a handful by region. Some elect to concentrate on specific sectors (such as wind-turbines), some operate in specific regions, and others provide services to other ICP/UIPs or even the host network companies.
Connections are not the main driver of value in a regulated regional electricity or gas company; with large asset bases, quite rightly, considerable focus is given to asset management and network operations. Independent connections companies have a sole focus on the connections service. With this comes highly tailored cost effective business models and the need to differentiate in the face of competition.
It disappoints me that the utility industry, including the regulatory framework, appears to see the connections market in engineering terms – for example, high voltage connections, low voltage connections and so on. We independents classify the market by customer type – a residential developer has very different needs and priorities to a wind turbine installer, even if they both need a high voltage connection.
This client focus is at the heart of why independents are becoming more and more successful. My own company focuses on blue-chip residential developers because we are part of a major construction services group and have long-standing experience of house building.
So, let’s look at housebuilders as a client. Many residential developers still have war stories about their utility experiences, even in the competitive arena. Of course price is important, but most complaints centre on service aspects such as late delivery, poor communication and lack of co-ordination. Often the engineering and installed asset is to a very high standard but that can be as far as it goes.
Looking ahead, the market share of independents will continue to grow, particularly in electricity. We might also expect some consolidation among ICPs as true service providers win out. Clearly, regulatory incentives that mirror electricity and gas need to be developed in water to enable a true multi-utility sector that meets all the needs of clients.
Richard Harpley, managing director, TriConnex – an independent utilities connections provider.