HomeWorld RegionsEuropeDeregulation of energy market suffers setback in UK

Deregulation of energy market suffers setback in UK

LONDON, Sept. 19, 2000 (IndustrySuppliers.com)à‚–The scheduled launch of the new electricity trading system in UK may not take place on 21 November after all. The industry regulator, Ofgem, has admitted that the launch of the pioneering new market for trading power would have to be postponed until the end of the year as the computer systems may not be ready in time. The dummy runs of the New Electricity Trading Arrangements (Neta) that were scheduled for this week had to be postponed as a result of this.

However doubts had been expressed as early as July whether this deadline could be met. The Power industry had asked the government to consider a delay in introduction of NETA as they felt that the computer systems would not be ready.

NETA, UK’s pioneering attempt at leading the world in deregulating its energy markets is set to change the entire face of wholesale electricity trading in England and Wales. The new trading arrangements would be mutually beneficial to consumers and business users by considerably bringing the prices down. With the delay, however, the hopes that prices would come down quickly have suffered a setback.

In the present electricity trading system, there is a “pool” for trading electricity, equivalent to a clearinghouse. This means that electricity generated had a guaranteed customer. The electricity is offered for half-hour slots for the following day and the prices are set at the level of the highest bid accepted by the pool for any half hour period.

With the introduction of NETA electricity would be traded like any other commodity. It would increase the level of risk for both generators and suppliers, making prices volatile. It eliminates the safety net for the generator of the pool. The pool would now be replaced with a spot and futures market. This would facilitate direct trading between generators and suppliers instead of taking a price from a pool. Under the new arrangements, the generator would have no choice but to supply electricity at the price quoted by it unlike the present scenario where it might quote one price but may receive a higher one.

According to a spokesman for Ofgem, during the last ten years, the generation costs have come down by nearly 50 per cent but there has hardly been any reciprocating effect on the prices. Customers and the regulator have suspected a nexus between the generators to manipulate prices for long. For instance false offers made would increase prices for all the electricity sold for that particular half-hour block and supply can be lowered in order to increase prices. With NETA in place, companies would have to get used to the idea of lower profits due to increased competition.

NETA will come into effect at a price of à‚£90 million to Ofgem while each of the 90 participating companies would have to cough up to à‚£10m each for the new computer systems. With increased risk factor for both generator and supplier, prices are expected to fluctuate greatly under NETA. This implies that in such a scenario only big companies that can absorb shocks would be able to survive. The electricity groups would also need to optimise the mix of supply and generation assets.

In anticipation of the introduction of NETA, electricity prices have already fallen by more than 10 per cent. In the futures market, there was a marked 15 to 20 per cent reduction compared to last year. The industry meanwhile is busy preparing itself meet the challenges of NETA. United Utilities and British Energy both sold their domestic energy supply businesses last month as they felt that with NETA in place they would have to face new volatility in prices.

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