Why did British electricity prices fall after 1998?

1. Why did British electricity prices fall after 1998? Joanne Evans & Richard Green University of Hull

2. A truth universally acknowledged • An electricity market with high prices is in want of a remedy - More competitive structure (no of companies) - More generating capacity - New market rules • England and Wales have had all 3 since 1998!

3. E&W Electricity Prices £/MWh (99/00)

4. Generation in England and Wales

5. Review of Electricity Trading Arrangements • Set up autumn 1997, reported summer 1998 • Pool was anti-competitive, anti-coal • System Marginal Price rule was at fault • Compulsory market was inappropriate • Bilateral trading, at negotiated prices, better

6. RETA (Oct 97- Jul 98) NETA (Oct 98- Oct 99+) Utilities Act 2000 Planned ‘Go Live’ Nov 2000 Actual ‘Go Live’ 27 March 2001

7. Forward Markets Bilateral Forward Contracts Day-ahead markets (OTC / Exchanges) Gate Closure (T-1) Balancing Mechanism Imbalance Settlement SBP / SSP

8. Imbalance Settlement • If you bought too much / sold too little (you are “long”) you are paid the System Sell Price • If you bought too little / sold too much (you are “short”) you must pay the System Buy Price

9. Monthly Electricity Prices £/MWh

10. Generation in England and Wales

11. E&W Electricity Prices £/MWh (99/00) NETA: RPD plus Balancing

12. Our approach • Regress monthly average prices on measures of capacity concentration, surplus capacity, and marginal cost, with dummy variable for the period after NETA

13. Comparison with Bower (2002) • 1996-2002 versus 1990-2002 • Estimated marginal cost versus fuel prices • Overall capacity concentration, versus by fuel type • One main event dummy, versus several • Parsimonious, versus general-to-specific

14. Nuclear New Gas Old Gas Coal Oil Marginal Cost Estimates £/MWh GW

15. Monthly Electricity Prices £/MWh

16. Monthly Lerner Indices Lerner Index

17. Regression equations SMPLerner = a + b1 Herfindahl + b2 Herfindahl2 + b3 Demand/Capacity + b4 NETA PSPLerner = a + b1 Herfindahl + b2 Herfindahl2 + b3 Demand/Capacity + b4 NETA PSPLerner = a + b1 Herfindahl + b2 Herfindahl2 + b3 Demand/Capacity + b4 NETA + b5Sept00

19. What made prices fall? SMP PSP • Concentration: £6.71 £5.38 • Spare Capacity: £1.36 £1.35 • NETA: a rise! £1.20 • Capacity Payments: £2.78 (Based on MC of £13/MWh)

20. The SMP regression Lerner Index

21. The PSP regression Lerner Index

22. Could prices have anticipated NETA? • Sweeting (2001) finds signs of tacit collusion during 1999, breaking up in 2000 • Finitely repeated games can allow collusion if the end is not “too near” • Did the end get “too near” in October 2000? • Tested “pre-NETA” and “NETA” - similar • Used “para-NETA”, October 2000 onwards

24. What made prices fall? SMP PSP • Concentration: £0.71 £1.25 • Spare Capacity: £1.08 £1.40 • NETA: £4.00 £4.86 • Capacity Payments: £2.78 (Based on MC of £13/MWh)

25. Statistical comparators

26. Comparison of the SMP regressions Lerner Index

27. Comparison of the PSP regressions Lerner Index

28. What else was happening? • National Power and PowerGen were selling plant during 1999-2000 • Temporary incentive for higher prices

29. Monthly Lerner Indices Lerner Index

30. Monthly Lerner Indices Lerner Index

31. What else was happening? • Adjusted herfindahls had little impact • Vertical integration - NP& PG buying supply (especially RECs) • National Power and PowerGen were selling plant during 1999-2000 • Temporary incentive for higher prices • No important explanatory variable found

32. Conclusion • First regressions imply that NETA had very little impact on prices • Second regressions imply that NETA was vital in reducing prices • Slightly better statistical fit • Is there a convincing economic reason for the longer dummy variable?