London, May 30, 2001 — The replacement of the electricity pool in England and Wales with NETA (New Electricity Trading Arrangements) on 27 March 2001 is expected to be “broadly neutral” on the generation sector and credit ratings in the near term, Moody’s Investors Service says in a new special comment on NETA.
Moody’s believes that whilst a number of credit issues are materialising in the early days of NETA, these issues will not have a material impact on any of its current ratings. From a credit perspective, the industry will continue to be dominated by structural change such as M&A activity and the ongoing regulatory process.
The former electricity pool, whilst actually being broadly successful, was perceived to have a number of imperfections. “The primary goal of NETA has been to make the electricity market more akin to other commodities, albeit with considerable complexity due to the physical characteristics of electricity. A key expected outcome on the part of Ofgem (the industry regulator), and the UK government has been a reduction in wholesale electricity prices,” says Chetan Modi, Moody’s Senior analyst and author of this report.
Moody’s believes that NETA will not by itself have a dramatic overall impact on electricity prices. Official statements had suggested that prices might fall by around 10% due to the introduction of NETA. Despite recent falls in generation prices, Moody’s says this has more to do with other structural changes in the market place rather than the new trading arrangements. Indeed, the risks arising from NETA, and in particular the balancing mechanism, appear to have led to an increase in forward wholesale electricity prices since its introduction.
“In NETA’s brief existence, we have seen very high as well as negative imbalance prices. NETA appears to be forcing market participants to consider the true costs of their short-term operations, which was not necessary under the pool system.” Modi states. The agency believes that the mechanism is likely to remain volatile and illiquid going forward.
While there are inevitably certain winners and losers from such structural changes to the industry, it is perhaps too early to conclude specifically who they are. However, in broad terms portfolio generators with flexible plant will be able to manage the risks of the balancing mechanism better than single-asset generators.
The report is entitled “NETA: The Early Days” and provides an overview of the new electricity market in England and Wales. The areas explored include credit issues in the light of NETA’s introduction, the background to the new imbalance mechanism, the winners and losers following NETA, and the impact on prices.