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NETA brings in the new

The end of March saw the electricity sector in England and Wales hold its breath momentarily as the New Electricity Trading Arrangements (NETA) were introduced to the market. The ‘Go Live’ date of March 27 was the culmination of three years of work by the electricity industry, and marked the end of the ‘Power Pool’ system of trading.

Introduced several months later than originally planned, NETA is the new wholesale market for electricity trading in England and Wales. The time and money invested in preparation by the industry appear to have paid off, however, with the transition from the old Pool system to NETA going smoothly.

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“On day one there were about 70 participants,” said a spokesman for Ofgem, the industry regulator. “There were about 30 000 contract notifications, which means that we covered about 87 per cent of anticipated demand, and there were some price fluctuations, but we fully expected that.”

Also expected were some minor ‘glitches’ in the system, said Ofgem, which warned that further problems will probably occur over the next few weeks. “There is still much to be done,” said Ofgem CEO Callum McCarthy at the NETA launch. “We expect teething problems. We know that issues will continue to arise after NETA ‘Go Live’. All concerned will be working hard to ensure that NETA is implemented successfully.”

The government and Ofgem believe that the new arrangements will heighten competition in the wholesale market and drive down prices for industrial and domestic customers. Contracts signed by industrial customers have already fallen by 10-15 per cent over the last year and by up to 35 per cent for major energy users over the past two years, and Ofgem has put this down to the impending introduction of NETA.

“NETA will fundamentally transform the way electricity is traded,” said McCarthy. “Since privatization, generating costs have come down by between 25 and 40 per cent but this has not been reflected in prices. NETA is part – a critical part – of the process which is already creating more open competition and putting downward pressure on prices.”

The NETA programme was initiated in 1997 after a government review of electricity trading arrangements revealed that the Pool system was flawed, uncompetitive and susceptible to manipulation. Driven by Ofgem and the government and in close consultation with the industry, new trading arrangements – designed to promote transparency and liquidity – took shape (see PEi October 1998 Vol. 6 Issue 8, p19-21, and PEi December 1999 Vol. 7 Issue 10, p18-20).

Under NETA, the bulk (around 90 per cent) of electricity is expected to be traded forward through bilateral contracts or through independent power exchanges, while a balancing market, operated by the National Grid (NGC), serves as a near-real time clearing mechanism to settle any imbalances between contractual and physical positions.

NETA is therefore a commodity-style market and as such, is expected to increase competition in the wholesale market and put downward pressure on prices. It has therefore been welcomed by consumer groups such as the Major Energy User’s Council, but for some participants, the road to NETA has been a difficult one.

NETA was originally scheduled, somewhat ambitiously, to be implemented in April 2000. The programme was postponed to October 2000 and delayed again to March 2001, mainly due to problems in implementing the complex systems needed.

Rigorous testing of both the central and participant systems was carried out in early 2001, but it was not until March 15, 2001 that the ‘Go Live’ date of March 27 was confirmed. Some participants expressed concern over outstanding technical problems and the difficulties they had experienced.

PowerGen says that it has invested around à‚£25m ($36m, €40m) in NETA readiness. David Porter, CEO of the Association of Electricity Producers, estimates that the generation sector alone has invested around à‚£500m in preparing for NETA, and believes the financial investment has been a particular burden for small players.

“For some of the small generators, [NETA] remains a nightmare. The systems that are required are quite demanding and expensive, and some [small generators] find it more difficult than larger players to predict their output,” said Porter. “We made it clear early in the process that there would be problems of this kind, and these should have been addressed sooner than they were.”

According to Porter, some of the smallest generators have not even implemented the necessary IT systems to participate in NETA, and are having to trade with the assistance of suppliers.

NETA will continue to present difficulties for small players, according to Porter, but will also be a fresh start for many in the industry. “Across the board … I am quite certain that [generators] will make NETA work,” said Porter. “They want to get their product to market, so there is enormous commitment in the generation industry to make the transition as smooth as possible.”

Porter’s main concern is the role that the regulator will play in NETA. “It is essential that the new market should be allowed to work, and that politicians and regulators should not become over-involved in it, and not over-react to any short term volatility.”

Porter pointed out that Ofgem has once again raised the possibility of imposing new licence conditions on the generators to prevent market abuse taking place. “The new trading arrangements were supposed to cut out [abuses] that were alleged to have happened in the Pool,” points out Porter. “A lot of money has been spent on it, a lot of time has been invested in it, and at the moment, we are hard pushed to see what market abuses might occur.”