The New Electricity Trading Arrangements in England and Wales

9 May 2003

Full report: The New Electricity Trading Arrangements in England and Wales

The New Electricity Trading Arrangements (NETA), a complex project to reform the way that electricity is traded in England and Wales, has been associated with a fall in the wholesale price of electricity, but the impact on the bills paid by many domestic consumers has been more limited, according to a report published to Parliament today by Sir John Bourn, the head of the National Audit Office.

The report shows that, since 1998, when NETA was first considered, wholesale electricity prices have fallen by around 40 per cent. Although it is clear that NETA has facilitated that fall in wholesale prices, it is not possible to establish what proportion of this fall was a direct result of the NETA reforms, and how much derived from other changes to the electricity market, including increased diversification of ownership.

The fall in wholesale prices has had consequences for users and producers of electricity:

  • users of electricity: Industrial and commercial users of electricity have seen significant falls in the price they pay for electricity, of up to 18 per cent since the start of NETA. Prices for domestic consumers have fallen little since the start of NETA but by up to 17 per cent since April 1998 for customers who have switched supplier. Although nearly 40 per cent of electricity customers have switched supplier, the apparent reluctance of others may have dampened price competition, so enabling suppliers to charge up to 22 per cent more to consumers with their original supplier than they charge to attract new customers. The report recommends that Ofgem should keep under review why domestic consumers who have not switched supplier have benefited much less than other consumers from falling wholesale prices.
  • producers of electricity: Some producers of electricity have encountered financial difficulties. There had been a large amount of investment in and purchase of power stations in the 1990s, and some of these transactions were based on assumptions about electricity prices which have turned out to be too optimistic. For strategic reasons and because of international treaty responsibilities for nuclear safety the Government have intervened to rescue British Energy by advancing it a credit facility of £650 million to British Energy.

Ofgem estimated that market participants could incur total costs of up to £580 million in implementing NETA over the first 5 years, and then operating costs of £30 million a year. Costs to participants in the wholesale market have certainly increased since the introduction of NETA. Ofgem themselves cannot influence the costs of trading in decentralised markets. However, through their oversight of the governance of NETA they can help to ensure that the administration of the trading arrangements is efficient. The report recommends that Ofgem should ensure that the efficiency of the trading arrangements is promoted by ELEXON, the company responsible for administering the trading arrangements.

The Government, regulator and society attach great importance to long-term security of supply – that is, that there is enough generation capacity to meet electricity demand at all times. In competitive markets, like that created by NETA, price movements signal the need for investment. For example, shortages in generation capacity would lead to higher prices which in turn would encourage companies to invest in more generating capacity. The companies would make such decisions on the basis of their assessments of future opportunities and price signals. At present, there is no problem with the security of supply. There is however no guarantee that the response to market signals will always work as intended. The report recommends that Ofgem should report regularly on whether there are barriers that could prevent market participants responding to market signals to ensure security of supply.

"Ofgem, together with the electricity industry, has achieved much through the NETA programme of reforms. But my report shows that there are a series of questions that the regulator will need to continue to keep under close scrutiny. How much of the savings in the wholesale market will be passed on to retail customers? How sure can we be that the lights will stay on? And can Ofgem monitor the market so as to prevent market abuse distorting prices?"

Sir John Bourn, head of the National Audit Office, 9 May 2003

Notes for Editors

 

  1. In response to these objectives, Ofgem and the Department developed a vision that the wholesale market should develop a more market-based system of trading. These new arrangements would be based on bilateral trading between generators, suppliers, traders and customers. They would operate as far as possible like other commodity markets whilst, at the same time, making provision for the electricity system to be kept in physical balance at all times to maintain security and quality of supplies. It was also important that NETA as a commodity market would deliver outcomes compatible with wider government objectives. NETA went live in March 2001.
  2. ELEXON is responsible for managing the provision of the necessary central systems and services to effect the trading rules under NETA, and for managing the governance processes relating to NETA. ELEXON also supports the Balancing and Settlement Code Panel, a body of individuals that represent a cross-section from the electricity industry that considers proposals for modifications to the trading rules.
  3. Press notices and reports are available from the date of publication on the NAO website at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
  4. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 800 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.
Contact: Mark Strathdene
PN: 40/03
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