Scottish Hydro-Electric PLC

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Scottish Hydro-Electric PLC

10 Dunkeld Road
Perth PH1 5WA
United Kingdom
(01738) 455040
Fax: (01738) 455045

Public Company
Incorporated: 1989
Employees: 3,525
Sales: £792 million
Stock Exchanges: London
SICs: 4911 Electric Companies and Systems; 5712 Furniture Shops

The smaller of the two Scottish electric companies, Scottish Hydro-Electric PLC generates, transmits, and supplies electricity to the Scottish Highlands and Islands. Hydro-Electric’s position in the U.K. electricity industry is unique, serving as it does a region comprising some 25 percent of Britain’s total land area—and encompassing some of the United Kingdom’s loveliest yet least hospitable terrain—but containing only 3 percent of its population. Though it got a late start relative to electricity suppliers in England and Wales, Scottish Hydro-Electric has, over the past 50 years, brought electricity to the north of Scotland virtually single-handedly, first as a public sector utility and later as a privatized company. The generation and provision of electricity in the Highlands remained the company’s core business, but in the 1990s it significantly broadened its market to include areas south of the border.

The harnessing of electricity for public use developed more slowly in Scotland than in England and Wales, where nearly 500 separate electricity suppliers had arisen within just 40 years following the introduction of street lighting in 1881. In Scotland the first electricity was supplied in 1890 via a water turbine at Fort Augustus. The first commercial use of water power in Britain came in 1896, when the British Aluminum Company set up a factory at Foyers on Loch Ness, utilizing the water coursing down the slopes of the Great Glen to power its aluminum smelting. But subsequent development, particularly in the remote and sparsely populated Highlands, was slow. There were few schemes until 1930, when the Grampian Electricity Supply Company began operating projects at Rannoch and Tummel Bridge, Perthshire, and at Luichart, Ross-shire.

These projects were by no means far-reaching, however; as late as 1943, five out of six farms and 99 out of 100 crofts in the Highlands had no link to publicly supplied electricity. In that year the North of Scotland Hydro-Electric Board was established by an act of Parliament. When, five years later, the electricity industry was nationalized, the projects of Grampian Electricity and other independent suppliers came under the jurisdiction of the new board.

The formidable work of harnessing water power in the Highlands now began in earnest. Within Britain, only in the Scottish Highlands could hydro power be utilized so extensively for electricity generation. The Highlands boast some of Britain’s highest mountains, large expanses of uninterrupted high ground, vast tracts of moorland, and numerous large and deep lochs. All these features provide ideal conditions for the use of hydro power. At the same time, those very features of the landscape often proved a barrier to development. Coupled with the scattered and isolated nature of Highland settlements, they made transmission of power a difficult task indeed. Nonetheless, work progressed with a labor force averaging between 4,000 and 5,000, and at one time reaching as high as 12,000. By 1965 about half of the area’s estimated potential had been realized. This equated to 54 main power stations with a generating capacity of more than 1,000 megawatts, 56 primary dams, 300 kilometers of excavated rock tunnels, 300 kilometers of aqueducts and pipelines, 32,000 kilometers of overhead cables, and 110 kilometers of submarine cables.

Despite its history and even its name, only a proportion of Hydro-Electric’s power was generated by water. In 1994, the breakdown of the company’s power generation sources was as follows: 16 percent hydro; 51 percent oil and gas; 11 percent coal; 19 percent nuclear; and 3 percent other. However, the use of hydro power fluctuated year by year, sometimes considerably, depending on rainfall; in 1993 the hydro figure had been 26 percent. The high percentage of oil and gas use was accounted for primarily by one station: Peterhead.

In the early 1970s the North Sea oil boom brought rapid development to the northeast of Scotland, and with it a heavily increased demand for electricity. Hydro-powered electricity had served the region previously, but this was inadequate for the surge in requirements for geographical reasons. Scotland’s northeast, which mainly consists of a low plateau, is unusual in the Highlands in that it has no proximity to a major river system. Thus plans were laid for Hydro-Electric’s major thermal power station.

Begun in 1973 and based at Boddam, near Peterhead, the plant was fully operational by 1982. Originally oil had been the favored fossil fuel, but by the time the project was completed natural gas had become a more popular option for the electricity industry (although the Peterhead plant retained its oil capability). In 1988 Hydro-Electric arranged to buy the entire natural gas yield of the Miller Field in the North Sea, thus securing itself a continuing supply from 1992, when the gas came on stream, until well into the next century.

In the late 1980s Britain’s Conservative government laid plans to privatize the electricity industry, and Scottish Hydro-Electric was accordingly incorporated as a private company in 1989. The company’s shares were sold on the stock market in 1991. The privatized electricity industry in Scotland was structured differently than in England and Wales. In Scotland, Hydro-Electric and its southern counterpart ScottishPower were fully integrated: that is, they generated, distributed, and supplied electricity. In England and Wales, however, the system was more fragmented. The electricity generators, principally National Power and PowerGen, produced electricity, which was then distributed via the National Grid to the Regional Electricity Companies (RECs), who in turn supplied electricity to consumers.

The Scottish electricity boards were originally slated to be privatized first, but eventually the government decided to proceed with the English RECs first, at the end of 1990. Hydro-Electric and ScottishPower were offered for sale in the summer of the following year. Some investors argued that in the interim the government changed the rules so that the munificent premiums enjoyed by investors in the RECs were not available to those who invested in Hydro-Electric and ScottishPower. For reasons that have never been entirely clear, shareholders in the English and Welsh companies made five times more in capital gains than their Scottish counterparts. This history of inequity played a part in the controversy that arose in 1994 between Hydro-Electric and the Office of Electricity Regulation (Offer).

Although privatized, Hydro-Electric remained a monopoly supplier of a public utility, and as such was subject to government regulatory control. It was Offer’s task to balance the interests of Britain’s electricity consumers against those of the industry’s shareholders. The job proved to be a particularly sensitive one in 1994, when Offer assessed the position of the electricity industry for the first time since privatization with a view to setting a new round of pricing controls. The English and Welsh RECs were reviewed first, and the consensus among financial analysts was that the RECs had been treated very leniently. Happy shareholders agreed, and the companies’ share prices rocketed to record levels. Some politicians and consumer groups were less pleased, however, and Offer was widely criticized.

Suspiciously minded observers speculated that Offer was mindful of that criticism the following month, when the Scottish companies were assessed with quite a different result. (Bowing to pressure, Offer subsequently announced its intention to re-review the English and Welsh companies, but a decision date was not revealed.) The main point of contention was Offer’s proposed price formula for electricity distribution, which allowed the RECs a rate of return of 6.5 to 7 percent, Scottish-Power 6 percent—and Hydro-Electric 2 percent. Hydro-Electric’s share price dropped dramatically after the regulator’s announcement.

ScottishPower accepted Offer’s decision, but Hydro-Electric protested vigorously. The company claimed that the stringent pricing controls would render it unable to undertake necessary improvements to its distribution network, on which it spent some £50 million a year. Hydro-Electric warned that power cuts would inevitably be suffered in its rural areas. When outraged critics labeled this nothing short of blackmail, Hydro-Electric chief executive Roger Young replied bleakly: “It isn’t blackmail, it’s a statement of fact.” After a month of deliberations, Hydro-Electric refused to accept Offer’s price caps, forcing the regulator to refer the matter to the Monopolies and Mergers Commission (MMC) for arbitration.

Since privatization, Hydro-Electric has been increasingly looking to expand its market, in terms of both geography and product. Toward that end, the company began aggressively seeking opportunities south of the border. In 1994/95, Hydro-Electric opened three new power stations in England, each as a 50-50 joint venture with another firm. The biggest project was at Keadby, South Humberside, where Hydro-Electric, in conjunction with Norweb, finished a 680 megawatt combined cycle gas turbine plant, operated through the subsidiary Hydro-Electric Production Services. The other two projects were combined heat and power (CHP) schemes: a 157 megawatt plant built at Sellafield in cooperation with British Nuclear Fuels, and a Dover-based 9 megawatt plant built to deliver steam and electricity to the project’s partner, the papermakers Arjo Wiggins Appleton. These three projects together accounted for 15 percent of Hydro-Electric’s total generating capacity; add to this electricity generated in Scotland but supplied to England, and Hydro-Electricity’s production south of the border rises to 30 percent, or about 2 percent of the entire English market.

In 1993 Hydro-Electric launched an important project as a joint venture with the U.S. oil and gas company Marathon: Vector Gas Ltd. With the gas industry well on the road to deregulation, Hydro-Electric was eager to penetrate a wider energy market. Vector sold gas to commercial and industrial customers throughout the United Kingdom under its “HE Energy” brand. One of the company’s highest-profile clients (among the more than 1,000 it served) was beer and leisure industry giant Scottish & Newcastle.

Gaining experience in the retail gas market was an important move for Hydro-Electric, because its core electricity business was in a region where 40 percent—an unusually high percentage—of water and space heating was provided via electricity. Competition from gas was sure to arise in the future, and Hydro-Electric hoped to be able to persuade its electricity customers to become its gas customers too, rather than switching to other suppliers.

Clearly Hydro-Electric viewed its future as stretching beyond the boundaries of its traditional role as electricity supplier to the Highlands. While the company stressed that its commitment to its home base of the north of Scotland remained its first priority, it also became apparent from the firm’s initiatives and pronouncements that Hydro-Electric intended to continue to expand beyond its borders and beyond its core business to play a significant role in the production and supply of energy in the United Kingdom.

Principal Subsidiaries

Fellside Heat and Power Ltd. (50 percent); HE Gas Ltd.; Hydro-Electric Energy Ltd.; Hydro-Electric Production Services Ltd.; Hydro-Electric Supply Ltd.; Keadby Power Ltd. (50 percent); Vector Gas Ltd. (50 percent).