1 October 2002 – The New Electricity Trading Arrangement (NETA), introduced in England and Wales in March 2001, may soon be replaced by a mechanism more conducive to long-term security of power supply and to renewable energy. Mikhail Masokin, Senior utilities analyst at Datamonitor offers his views on what has brought about this change.

“The introduction of NETA a year and a half ago did away with the old Electricity Pool system, under which the large generators were thought to wield too much market power. As a result, wholesale prices tumbled by as much as 40 per cent.

However, the new regime made uneconomical much of Britain’s base load capacity, including British Energy’s nuclear power stations. At the same time, NETA decimated the UK’s budding renewable power industry, as well as such energy-efficient electricity production methods as industrial cogeneration and combined heat and power (CHP) plants. Not only are these non-traditional sources of electricity more expensive to run than conventional thermal power plants, but their output is often unpredictable, making the producers liable to ruinous non-compliance fines under NETA rules.

Almost immediately after NETA was introduced, the green lobby argued vociferously for a revision of the new arrangement, making it more accommodating to renewable and CHP producers. After all, many hoped that in the long run renewable energy would supplant nuclear power in the UK’s energy balance, as well as helping the government meet its Kyoto emissions reduction targets.

However, it was ironically the need to help the beleaguered nuclear power producer British Energy that finally made the government consider reviewing the NETA mechanism.

A convenient occasion for that has been the awaited extension of NETA, which currently covers only England and Wales, also to Scotland. The new trading mechanism, dubbed BETTA, has been one of the central subjects of a government White Paper on energy policy, due for delivery in mid-December.

Among other measures, the White Paper is likely to recommend the re-introduction of capacity payments, encouraging generators to maintain their reserve margins and thus making the supply of electricity more stable and secure. While not necessarily helping the CHP sector, the new system will make both nuclear power and renewable energy economically sustainable again.

What might make it politically easier for the government to act is the fact that the benefits of NETA failed to filter through to a sufficient degree to the consumer. While the wholesale prices fell dramatically over the last 18 months, business customers saw only 15-20 per cent average decreases, while residential users received none at all.

Thus, NETA’s main benefactors have been electricity utilities as well as those power produces whose plants burn gas and coal, producing millions of tonnes of CO2 and other climate change gases. Under these circumstances, the government might well realise that a purely market-based solution that NETA undoubtedly is cannot be hoped to deliver all the social benefits it hopes for.

Also, having burnt its fingers with Railtrack, the government must be tempted to tweak the rules of the game to enable British Energy to stand on its own feet, rather than prop it up with hundreds of millions of Treasury money.”