Many Oxfordshire people, who every day casually switch on the immersion to heat the water for their morning shower, are probably unaware that both the water and the power are provided by the same giant German company RWE, owner of npower and Thames Water.

Stand beneath the huge cooling towers of RWE's Didcot A Power Station and you immediately become aware of the company's two products.

The gentle sound of tumbling water assails your ears. The towers are effectively giant waterfalls, with the water visible at their bases, cascading from beneath the concrete cladding.

It is hard to marry the peaceful scene with the knowledge that the place, built in 1969 and reminiscent of a pre-electronic, heavy industrial age, is generating enough electricity to power two million houses.

It employs 285 people. The gas powered Didcot B station next door employs 65 more, and produces enough power for another 1.4 million homes.

Station manager John Rainford admitted the company was involved in regular meetings with the Environment Agency about water extraction from the Thames, anticipating a possible drought order.

He said: "We have to balance the ability to generate against the ability to extract."

His job revolves round such balancing acts cost and efficiency versus emissions restrictions, for instance or, more obviously, supply versus demand in a world of peaks and troughs where we all put the kettle on at exactly the same time such as half-time in a World Cup football game or turn up the air conditioning in offices during hot weather.

Restrictions Following privatisation of the electricity market in 1990, these balancing acts became potentially tricky for npower as a whole.

On the one hand, the company obviously wants to sell as much power as possible to keep up profits, on the other, it is constrained by increasingly rigorous carbon emission restrictions and, of course, fluctuating demand.

This March, the coldest for 20 years, the station produced record levels of power 1044 GWh (Giga Watt Hours).

In practice, such problems are to some degree ironed out by the activities of the National Grid which, Mr Rainford said, is pretty good' at forecasting demand, right down to the half-hourly prediction.

Mr Rainford added that the huge circular control room at the heart of the station, which resembles a set from a 1960s James Bond film, gives the station the flexibility to turn on and off at short notice.

Until fairly recently, it was cheaper to produce electricity by gas at Didcot B than by coal at Didcot A which suited the nation well, as the gas is produced at British North Sea fields.

Now, with world gas prices rocketing and North Sea reserves dwindling, that is not always the case. These days, according to market conditions, it is sometimes cheaper to produce power using coal.

Electricity is produced by npower at a number of power stations, using all methods except nuclear.

Mr Rainford said: "One of the reasons we have a mixture of different power stations around the country, and an active energy trading team, is to allow us to be flexible in how we meet changing demand."

The company points out that gas bills went up by 50 per cent last year, while electricity bills went up by 30 per cent.

The Didcot A station was designed to function on British coal. Now, however, the three million tons of coal arriving at the power station's railhead every year is imported from South Africa or Russia.

British coal, with its 1 to 1.5 per cent sulphur content, compared to just 0.4 per cent for its foreign rivals, simply could not be made to produce low enough emission levels to satisfy current regulations.

The power station produces 371,000 tones of ash each year, much of which is recycled in the production of breeze blocks.

Now the station, in line with company policy to diversify methods of power production, has invested £3m at Didcot A to enable it to produce power from biomass, consisting mainly of palm kernels and sawdust.

Mr Rainford said: "We are negotiating with local farmers to produce arcanthus grass as fuel too."

Currently, about two per cent of output comes from biomass, but npower plans to raise electricity production from the fuel to ten per cent of total output enough to supply 200,000 homes.

This is no public relations gimmick either. The company points out there are hard commercial reasons for using renewable' fuels, with the Government insisting electricity distributors such as Southern Electric buy an increasing proportion of electricity produced from renewable sources.

Here again npower is caught in a balancing act. Not only must the company produce more power from renewables, but it must also enter the carbon trading market the less carbon it emits, the greater the reward.

This month, the Government is expected to produce its long-awaited Energy Review, widely assumed to favour a return to nuclear power.

Meanwhile, Mr Rainford said power suppliers have been suffering from a lack of clarity in policy in a world where gas supplies are limited, and the future is dominated by ever-stricter regulations on carbon emissions.

What will replace the grand old lady of Didcot when she finally reaches the end of her life is still unclear.

Future plans are still dependent on a clear Government commitment about future policy.

Mr Rainford said: "In the meantime, it is our responsibility to make sure the lights don't go out."