Have domestic consumers benefited from the New Electricity Trading Arrangements (NETA) and other institutional changes designed to increase competition and reduce retail prices in the UK electricity market? Michael Waterson and his colleagues find that the net effect has been merely to rearrange where money is made in the system.
The electricity industry in the UK is separated into four basic elements: generation; (high tension) transmission; (local) distribution; and supply. In most cases, the distributor and the supplier are different entities. An analogy is the distinction between Amazon, the supplier, and the Royal Mail, the distributor.
Most people are aware that they can choose and switch their supplier (the company that bills them), and very large numbers of people switch supplier each year. Some may also recall that when the UK electricity industry was privatised in 1990, the system initially involved a "pool," in which demand and supply were equated half-hourly to deal with the problem that electricity cannot be stored.
Transmission and distribution are both regulated in price. Therefore, an optimistic description of the electricity market might say that it has two competitive stages at either end of the production process – generation and supply – with two strictly regulated stages sandwiched in between – transmission and distribution.
Despite a series of reforms, competition seems not to work particularly well in the retail market for electricity
But complaints about energy pricing have not gone away; indeed, far from it. The suppliers imposed double-digit percentage price rises on consumers in 2008. And the House of Commons Business and Enterprise Committee has reported several times, questioning among other things the extent of competition in various parts of the system, and calling for greater scrutiny and intervention.
We have been here before. Generation was first opened to competition in 1990. But following several interventions to increase competition, it was decided to transform the existing pool arrangements to reduce wholesale electricity prices and (as a result, it was hoped) to reduce the prices for final consumers.
This change was the introduction of the New Electricity Trading Arrangements (NETA) in 2001. The regulator OFGEM (Office of the Gas and Electricity Markets) regarded NETA as a success, so in 2005, it was extended to Scotland (under the name BETTA – British Electricity Trading and Transmission Arrangements), where different arrangements had been in place.
Shortly before NETA was introduced, competition in supply was rapidly rolled out across the country. This was viewed as such a success that all regulation was removed from the supply market in 2002.
The "big 6" generator-suppliers in the UK have significant pricing latitude at the retail level
Our research looks at the period 1999 to 2005 to assess whether NETA was a good idea for domestic consumers. In examining this period, we benefit from the fact that the market arrangements in Scotland were unchanged and the fact that the gas market, which had been privatised earlier, was essentially unchanged. We therefore have some fixed points on which to base our analysis.
We are able to construct a consistent comparison of wholesale prices before and after NETA. We are also able to compare England and Wales under NETA with Scotland under an unchanged system.
We find that although NETA did succeed in reducing generating margins, margins earned on domestic retail contracts increased. Putting these together, the net effect of this reform – and the various other changes that came in its wake, such as the significantly increased degree of vertical integration among generator-suppliers – was essentially zero.
Our results suggest that competition does not work very well in the retail market. This may be because market entry for new suppliers seems so difficult. And it means that the existing "big 6" generator-suppliers – British Gas, E.ON (formerly Powergen), npower (RWE), EdF, Scottish Power (Iberdrola), and Scottish & Southern – have significant pricing latitude at the retail level.
Where this matters particularly is in electricity supply to the vulnerable – the old, the poor and the confused – who probably find it more difficult to negotiate the system as it now exists.
This article summarises Price Transmission in the UK Electricity Market: Was NETA Beneficial? by Monica Giulietti, Luigi Grossi and Michael Waterson. Their research was funded by the Economic and Social Research Council (ESRC).