Why Did Electricity Prices Fall in England and Wales? Market Mechanism or Market Structure?

The objective of this paper is to measure the price impacts of the major regulatory interventions in the England & Wales wholesale electricity market from 1 April 1990 to 31 March 2002. More particularly, to establish whether falling prices during 1999–2002 were caused by the regulator (‘Ofgem’) forcing the dominant duopoly of fossil fuel generators to divest coal-fired plant, or because the Pool market mechanism was replaced with New Electricity Trading Arrangements (‘NETA’). Backward regression analysis of functionally equivalent elements of day-ahead prices under the Pool and NETA shows that changing the trading arrangements produced no statistically significant response except for the removal of Capacity Payments. In contrast, coal plant divestment, increased imports of foreign coal, and overcapacity caused by the ‘dash for gas’, caused the majority of the price fall. The direct system development costs, associated management costs, and increased operational risk of implementing NETA were therefore unnecessary because industry restructuring had already brought about a significant price reduction by March 2001. A number of fossil fuel plants, as well as the nuclear plant operators are in financial distress as a result of falling prices but as NETA had no impact on prices there is no need for further fundamental NETA reform. As in any other bulk commodity industry, prices can only rise after some firms have gone bankrupt and their capacity either sold off or closed down for good. In this case, that means the nuclear industry should not be rescued by the UK Government but allowed to fail and their assets sold to the highest bidder. Extending NETA to Scotland, as the British Electricity Trading and Transmission Arrangements (BETTA) will not benefit consumers without also breaking the Scottish generation duopoly. To achieve this, generators in England & Wales must be allowed to enter the Scottish market via an open access agreement covering the entire capacity of the upgraded Scotland–England interconnector. •