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Chart of the Week


The end of vertical integration…or not?

Tim Dixon Team Lead

Within the last decade the vertically integrated (VI) model, whereby companies own generation and supply businesses, has fallen away. In 2008 the traditional VI model was at its height – the Big Six (now a term that is largely redundant when used in the VI sense) owned over two-thirds of the generation fleet, and supplied over 90% of electricity by volume (99% in the domestic market). This approach helped mitigate the risk associated with volatile commodity markets and imbalance prices by routing power to a largely ‘sticky’ customer base within the retail arm. In essence the customer base provided a stable and long-term offtake route. Numerous factors have contributed to the traditional VI model no longer being favoured by the largest market players. From 2008 until mid-2016 wholesale power price were falling or stable, allowing new suppliers to compete against large players and disturbing the ‘natural hedge’ between generation and demand volumes. In 2009, in response to concerns about VI models deterring market entry, Ofgem introduced rules for the Big Six to produce segmental accounts to provide a degree of transparency on reported profits, which commenced the inexorable regulatory and policy focus on the sector and the larger players in particular. In 2014 Ofgem introduced Secure and Promote, which placed obligations on the Big Six, International Power, and Drax to improve access to wholesale products for smaller players, which has helped improve liquidity and encouraged other wholesalers into the market. The generation mix has changed significantly over the last decade too. Low-carbon ...

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