UK electricity and gas regulator Ofgem delivered a report to the energy minister on Friday which says that the Neta electricity trading arrangements for England and Wales has performed well in its first three months and delivered price reductions of 20-25 per cent compared with last year. In a separate report on the impact to small generators, the regulator concludes that greater government subsidies may be needed if the UK is to meet targets for the production of “green” energy.

In a letter to minister Brian Wilson, Ofgem’s chairman, Callum McCarthy said that market liquidity had produced a threefold increase in the volume of trades, and a doubling of the number of contracts struck compared to this time last year under the Pool. The National Grid Company (NGC) is working well to keep the electricity system in balance. Its daily costs of balancing the system have halved, which will also benefit customers.

McCarthy accepted that it would take time for the market to bed down as the market responds to new price signals and incentives. He said that, where needed, rule changes would be made.

The Neta report details trading since its introduction on 27 March and points to significantly lower wholesale prices than under the Pool which, while good news for customers, clearly makes life harder for all generators.

The report on the performance of smaller generators was produced by Ofgem at the request of Peter Hain MP and covers a two-month period. It reports the experiences of smaller generators (including renewable and Combined Heat and Power – CHP – plants) operating under Neta. Ofgem surveyed 500 smaller generators of which only 106 sites responded.

The report said that prices achieved by smaller generators who responded to Ofgem’s survey were 17 per cent below those achieved last year under the Pool. These reductions are somewhat smaller than for generation prices overall. Output from respondees had however fallen by 44 per cent compared to the previous year. Lower prices are one factor but there is evidence that higher fuel costs, which have risen 14 per cent in the last year, have also contributed.

It also concludes that, other than wind power, the output of smaller generators did not appear to be significantly less predictable than for other generators.

McCarthy said, “With lower prices for all generators, including those producing ‘green energy’, there is a need for the government to review whether its targets for renewables can be met within the levels of subsidy now proposed by the government. In particular, if for wider environmental reasons the government wishes to encourage forms of renewable generation whose output is less predictable or less reliable, there is a need for the government to consider additional support for these types of generators”

Under NETA prices reflect the true value of reliable plant. Unreliable generating plant imposes costs, as NGC has to bring more flexible plant onto the electricity system to keep it in balance.

Some changes to NETA rules have been, and can be, made which have the effect of limiting the impact on less predictable plant. It is not within the scope of NETA rules to change the principles and to do so would put at serious risk the benefits to customers.

Mr McCarthy concluded, “Put simply, reliable plant commands a premium under NETA as the majority of electricity customers want a reliable source of supply and the electricity system needs to be kept in balance at all times to maintain the security and quality of supplies”.