Return to Archive -by date - by topic.

INFORMED SOURCES July 2005

Energy costs rising

Electric traction is becoming more expensive to run, too

After a decade of privatisation, I still keep finding obscure pockets of legislation and regulation which this column has never gone into. The odd thing is, that when I decide to bore the Informed Sources readership with my latest piece of arcana, it suddenly becomes topical.

Take the supply of electric current for traction. Or EC4T as the home boyz at ORR call it.

That can't be mind numbingly complex, can it? Surely Network Rail buys the power and passes the cost onto the train operators?

Afraid not. After the first year of a new Control Period, EC4T charges are linked not to what Network Rail pays for the power butto the DTI's Moderately Large Users Index (MLUI).

In addition Network Rail's invoices include a charge to cover the costs of the electrification infrastructure. This totals around £8million a year.

Loss

Theoretically, the full cost of EC4T is passed on to the TOCs. But in the first five year Control Period (1996-2001) Railtrack under-recovered its costs by about £30million because of the MLUI.

Railtrack placed long term contracts for electric power. But when wholesale prices are falling, the index also falls. This meant that after the first year TOCs were paying less than the cost of the power to Railtrack.

Back to the present, Table 1 shows Network Rail's estimates of income from EC4T over the 10 years of the latest Business Plan, plus the annual increase in income (what it charges the TOCS) and cost (what it pays. Because charges are index linked, after three years all Network Rail can do is assume constant income.

Now if you are bidding for an electric franchise, like Integrated Kent for example, EC4T represents a small, but significant, number in your business plan. In effect, you are having to double guess the movement of the MLUI over the next seven to 10 years.

Table 1

Network Rail National income projections

EC4T

£m (2004/05 prices)

* Forecast

Source: Network Rail

Not surprisingly, during the last Periodic Review it was argued that the MLUI is not an appropriate benchmark for the procurement costs of EC4T. Railtrack suggested amending the existing process when new price indices emerged from the electricity price review. That has yet to happen and charges continue to be based on the MLUI.

One problem is the hysteris in the index and its application. Under Track Access Agreements, EC4T charges for each financial year starting April 1 are indexed against the MLUI for the second quarter of the previous year. DTI publishes the second quarter MLUI in December of that year.

Real life

I warned you this was an arcane subject, so let's put some real dates into the theory. In 2006/07, EC4T charges (set in 2004/05) will be indexed against the second quarter 2005 MLUI which will be published at the end of this year, with provisional figures available in September.

Does this all matter? Oh yes.

Electricity prices have been falling since 1999. But average wholesale electricity prices rose by just under 50% over the last three quarters of 2004 and the first quarter of 2005 shows a 37% year on year increase.

Network Rail has already warned TOCs that its expert advisors are predicting an increase of up to 30% in the cost of EC4T in 2006/7. And according to Informed Sources open access freight operators have been notified that the cost of electric current for traction on the West Coast Main Line is to rise by 40%. Note that freight operators are not covered by the indexing system which is part of franchised passenger operators' track access agreements.

Meanwhile, the latest MLUI is for Quarter 4 2004 which showed an increase of 9.7%. Energy wonks think this is the precursor of a sustained rise in the index which, as the Network Rail advice to TOCs indicates, will start to affect passenger operators' costs in 2006/07 and beyond.

There is some slight relief. The wholesale cost of EC4T, which is subject to indexation, represents around 75% of the total. The remainder covers transmission and distribution charges which are regulated and linked to the RPI.

And having lost money when the index was falling, Network Rail is now incentivised to beat the index, by obtaining better wholesale prices and trousering the difference.

Red diesel

So, is Capt Deltic hailing the triumph of internal combustion? Not when the cost of red diesel rose 18.1p/litre in March 2004 to 27.6p/litre in April this year. This column's call for lighter traction and rolling stock to reduce energy consumption is starting to look percipient.