Press Release - The New Electricity Trading Arrangements in
England and Wales
9 May 2003
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.
Sir John Bourn, head of the National Audit Office,
said:
"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?"
Notes for Editors
- 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.
- 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.
- 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.
- 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.
Press Notice 40/03
All enquiries to Mark Strathdene, NAO Press Office:
Tel: 020 7798 7183
Pager: 07699 788580